What Should A Proper Rent-To-Own Contract Include?
In a rent-to-own agreement, like any sort of formal agreement should be laid out in a complete and legally binding contract. This will provide both parties involved with security and confidence in the agreement.
A rent-to-own agreement ought to state that the potential buyers are able to move in either immediately or by a set date in order to work on improving their credit score and/or saving for a down payment. While many states have their own regulations, and no two rent-to-own contracts are alike, someone in a rent-to-own agreement typically rents the property for a set amount of time – generally between 6 months to 3 years- at which point the tenant can purchase the house from the current owner. However, it is not as simple as paying rent for three years and then buying the house: Certain terms and conditions must be met, in accordance with the contract.
The Money
In a rent-to-own agreement, the potential buyer generally pays the seller a one-time, usually non-refundable fee called option money, or option consideration. This provides the tenant the opportunity to purchase the house in the future. It is important to note that some contracts give the potential buyer the right but does not require that they do. If he or she decides not to purchase the property at the end of the lease, the option simply expires.
The wording of the lease is especially important because if the wording is not correct, the tenant might end up being required to purchase the house once the lease expires. Prior to signing anything, it is important that you speak with a professional or a real estate attorney prior to signing anything.
Rent
During the term of the lease, the potential buyer pays the seller a specified amount of rent, usually each month. The lease term is negotiable however, it often ranges between one and three years. In many rent-to-own contracts, a percentage of each monthly rent payment is applied to the purchase price.
The Purchase Price
The contract will specify when and how the purchase price of the home will be determined. In some cases, the buyer and seller agree on a purchase price when the contract is signed, this is often at or higher than the current market value. In other situations, the buyer and seller agree to determine the price when the lease expires, based on market value at that future point in time. It is not uncommon for buyers to prefer to “lock in” the purchase price if possible, especially in markets where home prices may be increasing.
Actually Purchasing The Property
If the potential buyer decides not to purchase the property (or is unable to secure financing) at the end of the lease term, the option expires. The buyer forfeits any money paid until that point, including the option money and any rent credit earned. If the buyer cannot purchase the property but has a legal obligation to (as stated in the contract), legal proceedings may be initiated.
If the buyer wants to purchase the property, he or she typically apply for financing (i.e., a mortgage) and pays the seller in full. According to the terms of the contract, a certain percentage of the option money and rent paid may be deducted from the purchase price. The transaction is completed at the closing, and the buyer becomes a homeowner.