An Intro to Rent-to-Own Lease Agreement: Everything You Need to Know

Defining Rent-to-Own Lease Agreement

A rent-to-own lease agreement is a residential lease agreement that includes an option for the tenant to purchase the property within a certain time period at an agreed-upon price. Rent-to-own lease agreements are also known as "lease with an option to purchase" and "option to purchase." Sometimes, they are referred to as "lease-option," but that can be misleading as there may or may not be an option to purchase. They can be beneficial to both tenants and property owners and represent a novel way of exploring a lease agreement. Some may be surprised that rent-to-own lease agreements are not commonly used, but there are benefits to them for both parties. Often, landlords do not want to commit to selling a home until they know they can and tenants have often been unable to secure traditional loans for a variety of reasons related to their income or credit history. As such, these rent-to-own lease agreements can provide tenants with the time they need to improve their financial situations while providing property owners with the reassurance that their property will be rented.
Usually, a rent-to-own lease agreement has terms like an option to purchase if the tenant desires , usually within a certain time period (some have up to five years to purchase). Not only does this allow the tenant to know that they can buy the property if they want, it gives them the ability to "try out" the property before committing. This also works for the landlord, who is guaranteed a reasonable term for the lease and a committed tenant who will keep the property well-maintained. Many have options for the tenants to purchase the home at current market value or fair market value. Generally, a rent-to-own lease agreement stipulates that a certain portion of the monthly rent is credited toward the purchase price. This is how the tenant is expected to make the down payment if they choose to purchase, but be aware that the landlord may keep this money if the tenant does not purchase the property. Rent-to-own lease agreements usually allow both the tenant and the landlord to break the lease prior to the expiration date but may require a fee. Often, the tenant will only be able to break the lease and move without penalty if they have provided their notice of intention by a certain date (such as 90 days prior to the expiration of the lease). Regardless of the reason for breaking the lease, the tenant and landlord may be able to mitigate their losses according to the terms of their rent-to-own lease agreement.

Essential Elements of a Rent-to-Own Lease Agreement

The key components of your rent-to-own lease agreement are the purchase price, rental payments, the amount of the option fee, maintenance responsibilities and the time period.

Purchase Price. Usually, the purchase price is set at or slightly above fair market value so as to leave nothing for discussion at the time the tenant exercises his option. Your option to purchase at a "prevailing rate" or "fair market value" on a particular date makes it seem like "the reason" why the property cannot be purchased almost impossible to prove in a court of law. The rent levels should be somewhat higher than market to effectively cover the landlord’s investment of even more cash.
Rental Payments. Your lease agreement can set forth the amount of the rental payments, when they are due and how they are to be made. In addition, this section can also describe any late charges that may be collected if the payment is not timely made.
Option Fee. The "option fee", also sometimes called "consideration" or an "equitable interest" can be many amounts and sometimes none. However, the higher it is, the more seriously it will be taken by the landlord. It also allows the landlord to have some money tie-in to the arrangement.
Maintenance Responsibilities. It is best to describe the level of maintenance that will be expected of the tenant and the timeframe it must be completed by. You cannot prescribe how the maintenance be completed but you can communicate your expectations upfront.
Time Period. The landlord and the tenant will need to come to an agreement about how long the tenant will be allowed to rent the property before the tenant needs to move or purchase it.

Advantages and Drawbacks of a Rent-to-Own Agreement

Rent-to-own lease agreements can come with significant risks and advantages for both renters and property owners. Even though the major benefit of a rent-to-own lease agreement is the ability for a renter to eventually purchase the house they are renting, the initial financial cost of the home and long-term costs should be taken into consideration. Depending on the financial arrangements made in the rent-to-own contract with the owner, the price at the end of the lease period could potentially increase significantly.
Among the benefits of a rent-to-own agreement are the ease of qualifying for a mortgage and the fact that this is a good solution for people with less than stellar credit. Closing costs can almost always be considered at the end of the lease period and can even be applied toward the closing of the purchase. A portion of the rent is often applied toward the purchase price of the house, which can make the rent-to-own option more affordable than saving to get a house elsewhere while paying monthly rent on the current home. Renters can enjoy the benefit of knowing they will eventually own the home (if they choose to purchase it) as they are the owners of the lease.
Some disadvantages of rent-to-own lease agreements include the potential for losing out on the money already spent should the renter not choose to purchase the house at the end of the lease agreement. Rent-to-own contracts can result in a financial loss if the home’s value declines as the buyer could potentially be stuck with a mortgage for a house that is worth less than what was paid. Additionally, the monthly payments could end up being higher than those of a traditional mortgage loan were the buyer to acquire the mortgage loan instead of strong-arming an arrangement. Therefore, there is no guarantee the rent-to-own costs are going to be a better option than simply renting the house and then purchasing it later on.
Costs of property repairs are another potential disadvantage to the renter. It is possible for the rent-to-own lease agreement to implicitly or explicitly require that the renter perform maintenance on the property as necessary, which could result in unforeseen costs to the renter.
Rent-to-own lease agreements can be a highly contentious type of agreement between the renter and owner and should be approached with caution. Counselling from an experienced real estate lawyer is recommended so that the renter understands all costs and legalities involved in a rent-to-own lease agreement and the owner has peace of mind as well.

How to Write a Rent-to-Own Lease Agreement

Before drafting a rent-to-own agreement, it’s important for landlords to consult an attorney to ensure compliance with applicable federal, state and local laws. Developers should also work with an attorney to draft and structure a rent-to-own lease agreement that satisfies their unique needs.
Below is a sample of a lease-to-own option agreement.
PREVIOUS LESSEE OPTION TO PURCHASE AGREEMENT
Parties
This PREVIOUS LESSEE OPTION TO PURCHASE AGREEMENT ("Option") is entered into between LANDLORD and Tenant dated_______ pursuant to the terms and conditions set forth below.
[PROPERTY DESCRIPTION]
[RENTAL AMOUNT]
[LEASE TERM]
The "Revised Purchase Price Calculation" set forth above shall be calculated in the following manner:
[Ex. Lease is $1,500X12= [$18,000]-$2,000 security = 16,000X1.1 per owner’s manual =17,600/1,500 per month= $1,066.66 from tenants perspective to purchase the home.]
PURCHASE DATE. The Tenant shall have the right to exercise this Option at any time during the lease term and such purchase shall be completed on or before the end of the lease term.
NOTICE. The Tenant shall exercise this Option to purchase by giving Landlord written notice of such intent upon any day of the month to be effective on or after the lease term commencement date and at least 30 days prior to the Tenant’s desired purchase date.
EXERCISE OF. To exercise his option and purchase the premises, Tenant must give this notice in accordance with the terms of the lease. The closing of the sale shall occur.
CLOSING. At closing of the purchase, the consideration for the sale shall be the revised purchase price calculation, as described above.
OWNER ISSUES. During the lease term, the Tenant shall be responsible for any repairs or replacement of items normally managed and repaired by a landlord. Any such amounts paid by Tenant during the lease term shall be subtracted from the revised purchase price calculation outlined above.
CONDITION OF PREMISES. The parties agree that the premises are being leased in AS IS CONDITION.

Common Mistakes to Avoid in a Rent-to-Own Agreement

While rent-to-own agreements have become a popular and effective way to build equity, deal with bad credit, and get into the property of your dreams, they are not without their common pitfalls that both renters and landlords need to be aware of when entering into one. For renters, one of the most common issues involves the structure of the option to purchase, with those ending up being invalid or too specific – meaning you have lost the opportunity to negotiate a fair purchase price for the home. If you are considering a rent-to-own agreement as a way to work around your bad credit and save up for a down payment, you’ll want to ensure that the option to purchase is worded generically so the price can be negotiated when the time comes. From the landlord’s perspective , the most common pitfall relates to the structure of the rental period and the transfer of ownership. Without the right timeline in place, you risk the renter having too much time left to live in the house before they’re responsible for making mortgage payments and taking ownership – leaving you on the hook for the payments should they fail to pay you rent, or conduct necessary upkeep on the home. The timeline and process will differ depending on whether the tenant is a homeowner and whether there is a guaranteed buyout at the end of the process, or whether the option to purchase the home is subject to the tenant meeting certain criteria.

Sources for Rent-to-Own Lease Agreement PDF files

Establishing transparency is a good thing in business, which is why we are writing about rent-to-own lease agreements. We will now tell you more about where to find rent-to-own lease agreement PDFs.
First, what is rent-to-own leasing? The lease allows the lessee to buy the object being leased outright, at some period of time in the future, or at the end of the contract.
As a practical matter, it is very unlikely that a rent-to-own agreement really exists in the real world. State and federal laws might claim it does, but in practice, the fees charged by rent-to-own companies may be as much as four times higher than would be charged by a credit card company or bank.
If you feel you should still read on about rent-to-own agreements, then you are undoubtedly familiar with them, like it or not.
Turning to the subject of rent-to-own lease agreement PDFs, a search of the phrase on Google, Yahoo, or another major search engine will yield innumerable results.
Not all the results returned will be for a PDF format document. Nevertheless, it will be up to you to determine whether the PDF you are able to find is in fact an accurate one that you can rely upon.
Usually, it is a good idea to base your agreement on one that is already known as valid and not sample rent-to-own agreements that are just posted online for people to download for free. That is what you might get if you simply search for "rent to own lease agreement pdf." You will notice that there are a number of pay sites you can also visit where you can buy a rent-to-own lease agreement PDF.
They don’t come even close to being the more reliable route, however. It is best to go to the site of a rent-to-own company’s legal department to find a rent-to-own lease agreement that has been vetted by the company that produces it.
In direct contrast to what you will see with a Google or Yahoo search result, the rent-to-own agreement in PDF on the page you will see linked to below is a real agreement that has been proven to be legally valid in a court of law.

Legal Issues Related to Rent-to-Own Agreements

Rent-to-own lease agreements, also known as agreements for deed, agreements for sale, or contracts for deed, are a unique financing tool that help make homes accessible to the broadest number of potential homeowners. In addition to clarifying the role of the real estate agent in these transactions, it is also important to clarify the questions that an agent should ask and the legal requirements that need to be considered by both the seller and buyer.
State law addresses many of the obligations of a seller when they consider their financing options. In particular, the Michigan Security Deposit Act and the Residential Lease Act, both apply to these arrangements and impact the seller. For example, the Michigan Security Deposit Act requires that all security deposits be deposited in a regulated financial institution with interest mandated under section 6 of the State Borrowers’ Authority Act and provide a receipt to the buyer. Section 3 of the Michigan Security Deposit Act provides that the maximum security deposit cannot exceed 1.5 months’ rent. The lease payments must include a statement of how much of each monthly payment is for rent and how much is for an installment payment towards the purchase price. This is necessary under the Michigan Commercial Code, MCL 440.2207.
In addition to Michigan’s laws, the buyer and seller should also review a number of disclosures that are required by federal law. In addition to the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA) and related Integrated Mortgage Disclosures (Section 18) apply to rent-to-own agreements:
Under the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 Sales of Home Securities Rule CP 1026.3 and Regulation Z, 12 CFR 1026.3 require a creditor to determine that a buyer has a reasonable ability to repay the loan, including considering the buyer’s current debt obligations, employment, assets, income and credit history. A business day prior to settlement , creditors must provide the seller a Good Faith Estimate disclosing the monthly loan payment, if any, the principal amount of the loan, the total interest of the loan, the monthly period during which the loan is amortized and the term of the loan. If there is not a loan included in the agreement then the seller must provide a similar disclosure called the Itemization of Funds, 12 CFR 1026.19(f). Additionally, a seller who accepts a monthly payment from a buyer must provide each month a statement of each item from a list of disclosures including any pre-payment penalty, the total outstanding balance due under the contract and any details of transaction costs, rates, fees or penalties.
The HUD Coupons Pilot Project reported that over 30% of homebuyers experience a shortfall between the amount that they are contractually obligated to pay and the amount they were prepared to pay at closing. Of that group, 37% required a gift from a family member and 21% a loan from a family member. Both TILA and RESPA were introduced to protect vulnerable consumers, like first-time homebuyers, and prevent the type of predatory lending practices that plagued the housing market just prior to the recent recession.
These legal and regulatory considerations are essential for a real estate professional working with sellers who are seeking to enter into a rent-to-own agreement. Entering into one of these agreements invites increased regulatory requirements on the seller. Many of these requirements are triggered by the acceptance of a monthly payment from a buyer. For a buyer, they are designed to benefit the buyer by providing them with all essential information related to the financial transaction and educating them about available foreclosure relief options. Promoting these consumer-protection goals is also the primary goal of the Mortgage Loan Originator (MLO) license. Under Michigan’s Act 200, Public Acts of 2009 (PA 200 of 2009), MCL 445.1671(1)(d)(iii), workers who arrange for the financing of a rent-to-own transaction are obligated to meet licensing requirements.