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Rent-to-Own 101: How Do the Contracts Work?

Rent-to-Own 101: How Do the Contracts Work?

You’ve probably heard the term “rent-to-own” used with consumer products like furniture or cars, but it can apply to homes, too. If you’re a renter and have your sights set on buying a house down the road, a rent-to-own agreement is one path to get there.

This process starts with a contract

 (1.) Rental Agreement

(2.) Option to Purchase


Let's take a look on what you need to know about both:

Lease Agreement:

As being defined by Wikipedia, A lease agreement is a contractual arrangement calling for the lessee (tenant) to pay the lessor (owner) for use of a home.
In this case, your lease agreement will specify your rent (more on this in a minute) and the term — in most cases, it will be two or three years.
There will be several standard terms and conditions you’ll need to meet: For instance, paying on time, building and code violations, occupancy limits, and general conduct requirements. Violate these terms, and just like any tenant, you can be kicked out. However, this time, you also risk losing any money you’ve paid toward the home’s eventual purchase.
One big thing that may be different in this lease agreement: You, the tenant, may be responsible for maintenance costs and general upkeep of the home instead of the landlord. The logic here is that you’ll be motivated to keep the house in top shape if it will be yours in a few years.

Lease Option

Wikipedia explains Lease option (more formally Lease With the Option to Purchase) as a type of contract used in both residential and commercial real estate. In a lease-option, a property owner and tenant agree that, at the end of a specified rental period for a given property, the renter has the option of purchasing the property.
In this case, the lease option gives you dibs to purchase the home you’re renting, typically valid for a term equal to the lease term set forth in your rental agreement. So if the lease agreement specified a three-year lease term, the lease option will usually give you three years to buy the house without worrying about anyone else swooping in and snatching it out from under you.
To maintain first dibs, you’ll pay an option fee. The amount can vary widely: According to Zillow, anywhere from 2% to 7.5% of the home’s purchase price is typical. This option fee is then credited toward the home’s purchase at the end of your term. However, if you decide not to buy, you’ll lose the money.