If you have always rented and want to buy a home, is a rent-to-own or lease-to-own option for you? In the current aftermath of the economic downturn, some housing markets have remained flat. Some homeowners, not wanting to be long-term landlords are offering to a lease with the option to buy the home at a specified date in the future.
How It Works
Similar to leasing a car, the seller gives the tenant the option or right to buy the house or condominium in the future for a price agreed upon at the time they sign the lease. Both the buyer/lessee and seller/landlord speculate that the future value of the home will equal the agreed upon amount by the specified date. Another feature to many lease-option arrangements is that a portion of each monthly payment, typically about 20 percent, is set aside and credited as the buyer/lessee’s future down payment. In order to achieve this arrangement, the rent payment often is higher than a comparable for-rent-only home.
For a hopeful future homeowner, the situation can be a win-win. Qualifications to get into the lease typically are easier than to purchase a home, and the lessee is forced into a savings plan while the owner avoids having to pay a double mortgage for a property she has not been able to sell
Renting the home first gives the prospective owners an opportunity to experience living in the house and neighborhood before they commit to the purchase.
Read the Contract
Sometimes, this arrangement is one-sided. If the contract is entirely for the benefit of the owner, and the buyer decides not to purchase the home at the end of the term, or cannot otherwise get financing, the extra money in lieu of down payment often is non-refundable. Before agreeing to a rent-to-own arrangement, make sure that at least a portion of the extra money is refundable.
Some lease-option agreements contain wording making the purchase “less optional” and more an obligation, so ending a lease and walking away is not an easy task. Many tenants in lease-option arrangements chose the option because they did not qualify to purchase the home in the first place. Unless they diligently work at becoming more qualified, they may end up unable to buy the property at the end of the term and will lose both the home and the down payment money.
Unlike a regular lease where most property maintenance, especially big ticket items, is the landlord’s responsibility, some lease-options specify that the lessee is responsible, so fixing a leaking roof or replacing an appliance would not be refundable.
When it Makes Sense
A lease-option or rent-to-own arrangement makes the most sense when both parties can come out of the deal with what they put into it. If the sale falls through, the owner gets the property back plus the years of free maintenance and mortgage payments made and the buyer gets back most or all of the down payment money. Another time this arrangement works is when the seller is a family member or the property is in a family trust and one member want to purchase it. If the purchase fails to go through, the property returns to the trust.
Before committing to a lease-option each party should have a lawyer review the documents to make sure it is in the best interest of each.