Rent-to-own leases are when the tenant pays rent, and the owner sets aside part of that money for the tenant to use to put a down payment on the purchase of the home. These leases are sometimes referred to as a lease option to purchase.
How does renting-to-own work?
The tenant pays rent as usual. But part of the amount is counted as credit that they can use to buy the house later. It is similar to leasing a car.
Is renting-to-own right for me?
Maybe. Renting-to-own is an option if you do not want to, or cannot, buy right now. This could be because you don't meet the income or credit requirements.
Common parts of a rent-to-own contract
The tenant usually has to pay a fee to the owner for the ability to buy the home in the future. This is usually called option money or option consideration. This gives him or her the option to buy the house in the future.
The amount is usually between 2.5% and 7% of the price. This fee may or may not go towards the price of the home.
If the contract calls the fee a "lease purchase," that usually means that the tenant has no choice - they have to buy the house by a certain time.
The contract should say when and how the price of the home will be decided. In some cases, the tenant and owner agree on a price when the contract is signed. In other situations, they agree to decide on a price when the lease ends.
The tenant pays the owner rent, usually each month. The length of the lease is usually between one and three years. The contract should say how much of the rent is going towards the price.
The contract should say who has to pay for any repairs, homeowners association fees, property taxes, and insurance. Even if the owner pays, the tenant should still have a renter's insurance policy.
The contract should be specific to maintenance. Mowing the lawn, raking the leaves, and cleaning out the gutters is very different from replacing a damaged roof.
Buying the house
If the tenant decides not to purchase the home at the end of the lease, the owner keeps all of the money paid. If the contract says the tenant has to buy the house, the owner might sue them for not holding up their end of the agreement.
If the tenant does buy the house, they usually apply for a loan from a bank and then pay the owner. The part of the rent that the tenant has paid that has gone towards buying the house can then be used. The transaction is done at the closing, and the tenant becomes the new owner.
Updated: February 2017