Talking with a friend over the weekend he asked me for my advice on a home his daughter had seen with a sign out front that read “rent to own”.  He said she and her husband had been looking for a new rental to move into, but perhaps this may be the better option for them if they could actually own the home.  In listening to him I realized that he, and probably a lot of other folks don’t understand how “rent to own” really works.

Actually rent to own, in the Real Estate world is known as a Lease Purchase contract.  It is very similar to an auto lease agreement, but of course involving much more money and a much larger initial investment.  A lot of people simply refer to this as “rent to own”.  In order for a Lease Purchase to work it should contain two main elements at the onset.  One, a non-refundable binder and two an ending date.

So many times a seller who is looking to purchase another home, either up sizing or down sizing, must sell their current home first.  Usually it is due to the fact they can’t maintain the upkeep, taxes, insurance and payments on the current home while taking on the responsibilities of another home, not to mention lenders would probably not approve a new mortgage under these conditions.  

We are all very much aware of the current Real Estate market and how many homes are on the market with slow sales.  If an owner wants to make the move but perhaps does not have the luxury of waiting on their home to sell, they could sweeten the deal by offering rent to own, or Lease Purchase.

So just how does all this work?  A Lease Purchase is structured as a lease with the additional terms agreed upon in the beginning, in writing by all parties.  First the lease agreement will identify what the tenant and landlord are going to be responsible for during the term of the lease.  How much the monthly rent will be, who is responsible for the utilities, lawn maintenance, what repairs and son on, a normal lease agreement.  Now for the purchase agreement; A purchase price is agreed upon for a purchase at a future date, this future date is usually anywhere between one and three to five years, but I have seen them shorter and longer terms.  Now a non-refundable amount must be agreed upon, remember the seller is taking this home off the market for this tenant who now wants the option to purchase on or before a certain date.  This binder goes directly to the owner.  An additional monthly amount is agreed upon; this goes to the seller but is credited to the buyer towards his down payment.  It is also agreed upon what the buyer will be responsible for.

An example of how a Lease Option would work; the house is selling for $200,000, and typical rent would be $1,000 a month.  A buyer might pay $1,400 a month with the $400 going towards a purchase credit.   If the option fee paid up front at time of contract was $5000, and if this was for a three year period, then at the end of the option period the buyer now has $14,400 monthly credit plus $5000 option fee towards the purchase price. A total of $19,400 is now on the side of the buyer and they can proceed with their new mortgage for the balance and close on the property.

You must remember contracts are agreements between two parties and anything can be agreed to, but must be carried out to the letter in order for the contract to be enforceable.  
I have seen Lease Purchase contracts written many different ways, with buyers paying for all taxes, insurance and repairs during the lease period.  It could be written for the seller to be responsible for these, or a combination of during this time period.  Remember, we are working with a contract, an agreement where everything is negotiable, in the beginning.

The benefit to the seller to engage a Lease Purchase is the ability to now make the move they need to.  To be relieved of the financial burden monthly, and receive a monthly profit, don’t forget the non-refundable binder that is already in the pocket of the seller.  By entering into this agreement the sellers are more likely to qualify for a new mortgage on another home, debt to income is better.  For the buyer the benefit would be access to a home that they may otherwise not have access to, (ownership).  For various reasons buyers may need to clean up credit issues, or save for a down payment and closing cost, this is a perfect way for them to prepare for the day of closing, they will either have already paid their down payment or a large portion of it.  

The buyers now have “skin in the game” so to speak and are more likely to take care of the property because of the investment and the feeling of home ownership.  There are some safeguards I suggest for a buyer though.  Before entering into a Lease Purchase you need to visit a mortgage lender and make sure you will qualify in the future.  If you have credit issues to work on make sure it is understood that if you do certain things these issues will be cleared up and you will be able to complete the transaction when the times come.  Remember, the down payment and the additional monthly amounts are non-refundable.  At the end of the Option period if the buyer can’t close or decides not to close, any monies paid are lost, they now become tenants with no lease agreement and all it takes is a fifteen day notice, (Florida) to evict.  

A Lease Option to purchase can be great for buyers and sellers.  I do suggest though that if you are doing this on your own to engage the services of a Real Estate attorney.  If you are using a Real Estate Broker he or she can write the contract and talk with both parties to come to an agreement of understanding.  There are many different ways an option contract can be written, both buyers and sellers need to sit down and come to an agreement.   For additional Real Estate info visit;  www.galionpropertiessxm.com

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