Essential Rent-To-Own Terms in a Real Estate Contract

Categorized as Rent To Own Homes

The rent-to-own housing model has been around for quite some time now and for all its pros and cons, one thing for certain is that both buyers and sellers have benefited from it.

Not everyone has the funds to immediately purchase a house based on conventional means and there are times or places where the housing market is not that hot that a seller can immediately make a sale upon listing.

But please do take note that rent to own terms are different from standard real estate contracts you may have experienced before. Here are the essentials:

Rent-To-Own Contract Terms

1. The Difference Between a Lease Purchase or Lease Option Agreement

The most important thing to clarify in your contract early on is if you’re getting into a lease-purchase or a lease option agreement. [+info]

The difference between the two is that with a lease option agreement you’ll have an option but not an obligation to buy the property after your signed contract is over.

This kind of agreement is often used when the buyer wants to purchase the home but still needs to work on repairing their credit rating to secure a mortgage or promissory note.

A lease-purchase agreement, on the other hand, obliges the lessee to purchase the house once the contract is up. It’s advised that a seller or landlord think hard before putting their property up for a lease-purchase agreement.

2. Information About the Upfront Fee

A rent-to-own agreement would most likely require an upfront fee. This fee is typically non-refundable and also known as the option fee and will effectively give you the option to purchase the home once the contract is up.

There’s no rule that says that you cannot haggle with the seller with regards to an upfront fee but please do take note that it’s going to be around 2.5% to 7% of the price of the property.

This one should be clearly stated on the contract and should be pretty straightforward.

The contract should also indicate if the fee is applicable to your downpayment.

3. Payment for Rent

Just like the upfront fee, which is expected, you also have to clearly outline the terms of your rental payment.

Aside from the rent price, your contract may also outline the rent credit which refers to the % that the seller gives back to you through an escrow account since you’re renting to own the place.

The additional money that should go to the downpayment of the house or the purchase price should also be stated.

4. The Price of the House

Just like the rent of the house, its full price should also be stated in the contract.

One important thing to take note of is that the cost of purchase is generally a bit more than the market price because price growth is being taken into consideration.

It’s really important to get the purchase price right as early as now so that you’ll have no more confusion or disagreements later on.

And it’s actually not unusual for rent-to-own contracts to not discuss the purchase price of the property so be sure to demand it before signing off on the agreement.

5. Maintenance

Payments or terms around the maintenance of the property can get tricky really quick and so you have got to make sure to have a solid grasp of what’s on the contract.

This is where landlords can change how a usual contract is drafted because some maintenance payments may be based on their own terms.

What you have to do is to make sure that you understand them completely. Make sure that whatever agreement you talk about is stipulated in the contract, from fixing damages to maintaining the lawn and so on.

6. Any Other Expenses

The first additional expense that comes to mind is any HOA or homeowners association fees. Make sure to ask the landlord if there are any for your property.

Also, there can be additional maintenance fees on top of what you and the landlord agreed upon, so make sure to check on that too.

Also, make sure to outline who will pay homeowner insurance or property taxes on the contract and make it clear that whatever fees you don’t know about are to be shouldered by the landlord.

Or else, you’ll be shouldering fees you did not sign up for in the future.

7. Any Other Conditions

Any other conditions may not be very straightforward and you might need to go through your contract with a real estate agent or lawyer to understand what’s printed on the entirety of your agreement.

Please take note that you’ll be more invested in this property since you’re not just renting it and so it’s important that you understand what you’re signing up for 100%.

8. Terms of Renewal

You might want to have a renewal clause in your contract just in case you aren’t ready to purchase the property once your term is over.

This is like having a safety net for all the money that you’ll put into the place and it surely won’t hurt to have it in fine print.

You really can’t predict the future and if you really want to purchase this property then be sure to discuss with the landlord the terms of renewal for the contract.

9. Other Considerations

Please take note that landlords or sellers may draw up a contract in a number of different ways and so it’s up to us to ascertain what’s printed on this very important document.

Some of the terms may be legal, some of them may not be. It depends if they make the contract themselves or hire a lawyer for it. If you want to discuss the terms of having a pet in the house then do so, details like this could pop up.

To be safe, have an agent or lawyer by your side because the landlord can opt not to.

Final Thoughts

As you’ve just read, rent-to-own contracts are a bit more complex if not flexible to the terms of the seller or landlord. So, make sure to get yourself a good agent to protect yourself from the pitfalls of such an agreement.

Not all rent-to-own contracts are the same and it’s important that we know all the ins and outs of the one that’s going to be drafted for you.

After all, this is only your future home that we’re talking about.

If you need further assistance or guidance when it comes to housing or if planning to own one in the near future, be sure to follow us at [site name] for more tips and valuable advice.


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