How the Rent To Own Works

A “rent to own” arrangement is also known as a “rent with option”, “lease purchase”, and “lease option”. It is a combination of a lease agreement and a purchase option agreement. Most people know what a lease is. Under the purchase option portion of the lease purchase agreement, the “landlord/seller” gives the “tenant/buyer” an exclusive right to purchase the home at a pre-determined purchase price” during the lease term as long as the tenant/buyer abides by the terms of the lease. In exchange, the tenant/buyer gives the landlord/seller a non-refundable monetary amount, called an “option consideration”. This option consideration is usually given in lieu of a security deposit and is often credited towards the down payment when the tenant/buyer excersies their right to purchase the home. The amount of option consideration set by the landlord/seller is often on a sliding scale, typically between 1-10% of the purcahse price, based on the tenant/buyer’s qualifications.

• TENANT/BUYER WINS ~ Unlike a security deposit for a standard rental agreement or a down payment on a purchase contract, the option consideration is what is placed down when a tenant/buyer under a rent to own agreement.
• LANDLORD/SELLER WINS ~ The option consideration is non-refundable and typically more than a security deposit when compared to renting. It is typical to ask for between 1-10% of the purchase price as option consideration, depending on the applicant’s qualifications.

The main factors in determining the qualifications of a tenant/buyer are:

• Rent history (no evictions in past 5 years)
• Job history (2 months of documented income must be shown)
• Credit score (520 minimum, no pending bankruptcy)
• Amount of option consideration tenant/buyer has available to place down (more option consideration given can offset lack of qualifications in other area)

There are a few things that make the rent to own agreement different than a “standard purchase agreement” or a “standard rental agreement”. Below are some of the differences based on the landlord/seller using the rent to own agreement provided by theRTOplace.com:

• Security Deposit ~ Unlike a standard rental agreement, the rent to own agreement does not require a security deposit (or if required by state law, a minimal security deposit may be required). Why? The security deposit is replaced by a non-refundable option consideration. The option consideration gives the tenant/buyer the exclusive right to purchase the home during the rent to own term, as long as the tenant/buyer abides by the terms of the agreement. And, unlike a security deposit, the option consideration paid up front by the tenant/buyer is credited towards a down payment if the tenant/buyer wants to convert to traditional financing later.
• Maintenance ~ Unlike a standard rental agreement, the rent to own agreement requires the tenant/buyer to perform most maintenance on the home. This gives the tenant/buyer the opportunity to really experience some home responsibilities before actually committing to purchasing.
• Rent Credit ~ The rent to own agreement has the landlord/seller provide the tenant/buyer a “rent credit” during the term of the rent to own agreement. Rent credit is a predetermined amount of the monthly rent that goes to reducing the purchase price. It is given only if the tenan/tbuyer makes “on time” monthly payments and abides by all the terms of the rent to own agreement.

• TENANT/BUYER WINS ~The tenant/buyer accumulates rent credit to help reduce the purchase price.
• LANDLORD/SELLER WINS ~ In exchange for rent credit, the tenant/buyer agrees to do things such as pay on time, make minor repairs to the home, and take the home in “as-is condition”.

The tenant/buyer gets to move in once the option consideration and first month’s rent is paid and the rent to own agreement is signed. During the lease term, the tenant/buyer can work out any credit issues and/or save for a down payment required to obtain traditional financing prior to the end of the rent to own agreement.

The tenant/buyer makes rent payments to the landlord/seller during the term of the rent to own agreement. The landlord/seller is obligated to pay any underlying mortgage, condo/homeowner dues, tax, and insurance payments. The landlord/seller still gets any tax deductions for these items while making those payments.

• TENANT/BUYER WINS ~ The tenant/buyer has time to repair their credit and save any other money required to qualify for tranditional financing.
• LANDLORD/SELLER WINS ~ The landlord/seller should receive a steady payment from the tenant/buyer, which is valuable if the home is currently vacant or about to become vacant. Unlike a typical home purchase that may take 30 days or more to get bank financing, the home is occupied quickly and a monthly payment is received until the end of the rent to own term or the tenant/buyer qualifies for traditional bank financing, whichever comes first.

Once the tenant/buyer is able to obtain traditional financing to exercise their option to purchase, the tenant/buyer notifies the landlord/seller. Closing is arranged, title is transferred, and the tenant/buyer experiences all of the benefits of home ownership (tax deductions and appreciation). After closing, the tenant/buyer stops making rent to own payments and starts living and loving the American Dream of Homeownership! The landlord/seller has sold the house and avoided paying costly real estate commissions.

• TENANT/BUYER WINS ~ The tenant/buyer is able to live in a home they currently don’t qualify for under traditional financing guidelines and buy it later so they don’t have to move twice.
• LANDLORD/SELLER WINS ~ The landlord/seller has a consistent payment coming in until the tenant/buyer is able to qualify for traditional financing and gets to sell while avoiding real estate commissions..