How to Structure Rent to Own/Lease to Own Agreements
Property owners who are interested in maintaining control of their property while offering an option to buy can use a customizable rent to own contract template.Download Template
Residential and commercial property owners sometimes find the perfect tenant. Should they decide to sell a property which this tenant is renting or leasing, they may offer them the first option to purchase. Sometimes the timing does not work for the tenant, but they are interested in buying. This is a great opportunity to take advantage of a rent or lease to own agreement.
Since your normal business is not lending, chances are you may turn to a rent to own contract template. Remember, in effect, you will be acting as a lender in these cases, so make sure you have all the terms spelled out completely.
Here is What is Covered in This Document:
- Why Would Someone Rent to Own
- Anatomy of Rent-To-Own Agreement
- Further Recommendations to Protect You and Tenant
- Potential For Bad Outcomes with Rent to Own Options
- Helpful Resources
Why Would Someone Rent to Own?
There are numerous reasons a tenant would opt to rent to own versus continuing to rent or applying for a mortgage to purchase property. The most common reason is challenges of meeting the lender’s requirements needed to qualify for a mortgage.
Another reason a potential buyer may opt to rent temporarily with the option to buy is interest rates. Sometimes, by waiting, a buyer can obtain a good mortgage at a lower rate. They may also not have the capital needed to put a down payment on the property. Rent to own allows the buyer to lock in the purchase price as well. The benefits often outweigh the risks for tenants.
Anatomy of Rent-To-Own Agreement
There are several clauses which must be included in a rent to own or lease to own contract. You can use a rent to own agreement template and customize these sections to meet your needs and the needs of your tenant.
- Landlord/Tenant Names and Contact Information
- Property Description and Location
- Lease/Rent Agreement Period
- Amount and Frequency of Rent Payments
- Percentage of Rent to be Applied to Purchase
- Who is Responsible for Utilities (including water/sewer)
- Who is Responsible for Taxes to Town/City
- Responsibilities for Repairs
- Agreement on Property Modifications
- Rights of Termination
- Landlord’s Entry Rights
- Assignment or Subletting
- Terms of Purchase Option
- Notification of Exercise of Option
- Option Complete Terms of Purchase
- Financing Considerations
- Process to Modify Agreement
- Governing Law
- Signature of Parties
As you can see, there are several pieces of a rent to own agreement which require a great deal of thought before finalizing an agreement. Chances are the property owner (landlord) and the tenant (lessor or renter) will each have specific conditions which may need to be incorporated.
Further Recommendations to Protect You and Tenant
There are some legal steps you can and should take which can help protect you and protect the tenant including:
- Obtaining a professional appraisal — an independent appraisal should be obtained prior to reaching an agreement on the final purchase price. This simply makes good business sense.
- Obtain a full property inspection — by obtaining an inspection prior to signing a rent to own contract, you have a complete record of the property condition in the event the tenant later claims they found problems.
- Photographing the property — pictures are always helpful in showing the interior and exterior condition of the property.
Potential For Bad Outcomes with Rent to Own Options
Let’s face it, regardless of how solid your contract is, rent to own options sometimes do not work out as well as anticipated. There are some potential downfalls to these agreements including:
- Property condition — if the lessee (or renter) fails to maintain the property and then fails to make payments, your property will likely be worth less without an investment from you to improve the condition.
- Failure to pay rent — should the tenant fail to maintain rent or lease payments, as a property owner you will need to follow the usual eviction process in your state which could delay your finding a new tenant.
- Property value increases — property owners are potentially losing out on profit since you have a fixed value attached to the contract.
Finalizing a Rent to Own Contract Template
The final step in a rent to own agreement is obtaining the tenant’s signature. The execution of the agreement means both parties have agreed to all terms and conditions and are prepared to move forward. Now is your opportunity to see how you can use Nitro Sign to get any of your contracts or important documents signed by trying out our service for free.