Key Takeaways

  • Rent-to-own contracts (also known as lease-to-own agreements) provide a path to homeownership for tenants who may not currently qualify for a mortgage.
  • Typical features include monthly rent, option fees, purchase price terms, and whether rent contributes to the purchase.
  • Contracts should detail responsibilities for maintenance, taxes, and insurance to avoid confusion.
  • Two main types are lease-option and lease-purchase agreements.
  • Legal requirements vary by state, and these contracts must comply with landlord-tenant and real estate laws.

Good examples of rent to own contracts should include such factors as due dates, escrow, and whether monthly rent would go to the purchase price of the home. A rent to own agreement outlines an arrangement between various parties in the leasing of a property, and it allows tenants to purchase the property when the leasing term ends. A rent to own contract must be drafted according to state landlord-tenant lease laws and follow a state’s real estate commission laws.

Rent to own contracts are also known as:

  • Lease Option Agreements
  • Lease to Own Agreements
  • Lease with Option to Purchase Agreements
  • Lease Purchase Contracts
  • Option to Purchase Agreements
  • Contract to Deed Agreements

Rent to Own Benefits

A rent to own agreement is applicable when tenants want to rent properties for a certain period, usually multiple years, while having the option to buy a property at or before the end of the lease. Rent to own contracts are beneficial to tenants for a variety of reasons. For instance, tenants may not have a down payment or insufficient income to obtain a loan. In addition, their credit scores may not be high enough, or they may not be ready to commit to homeownership.

If you wish to buy a home, but your credit score is not high enough, renting a property with the option to buy it later starts you on a path to homeownership. In addition, it is a great option for renters who wish to buy a particular home, but cannot do so right away.

In a slower market, lease option agreements give sellers additional options while securing steady income source. If you have a hard time selling a property in a slow market, a rent to own contract can you enhance your cashflow until you sell the property.

Rent to Own Traits

Sellers and buyers can benefit with the assistance an attorney who specializes in real estate. A rent to own contract lists the same attributes seen in a normal lease agreement, such as:

  • Due date and monthly payment
  • Late fees and grace periods
  • Description of property
  • Homeowner and tenant info
  • Lease term

Rent to own agreements include details, including:

  • Option fees
  • Portion of rent going to the purchase price
  • Penalties if the agreement is violated
  • The way the property price will be assessed

Review all documents carefully, and you should make sure you fully understand the terms and conditions of the agreement before signing. You must assess a rent to own agreement carefully, but it is an agreement that benefits both parties and worth entering into.

Types of Rent to Own Agreements

Rent to own agreements typically fall into one of two categories, each with different legal and financial implications:

  1. Lease-Option Agreement
    This contract allows the tenant the option to purchase the property at the end of the lease. The tenant is not legally obligated to buy, and if they choose not to exercise the option, they can walk away—although the option fee is usually non-refundable.
  2. Lease-Purchase Agreement
    In this version, the tenant must purchase the property once the lease period ends. This is a binding agreement to buy, and failure to follow through could lead to legal consequences.

The specific type of agreement should be clearly stated in the contract, as it impacts the tenant’s obligation and legal protections.

Seller Preference

Sellers tend to offer a rent to own option if they do not intend to sell the property, or in the following cases:

  • A rent to own agreement comes with a higher sales price if the market declines
  • A contract lists tenants who properly care for the property
  • A contract possesses a longer rental term that has steady income
  • The seller has a positive cashflow on the property
  • The agreement comes with minimal risk and an option fee that’s not refundable

Further, a seller may place additional rents into a safeguarded escrow account that will go to the down payment. Certain sellers may place additional funds that’s paid off to the purchase price of the property. A rent to own agreement also has no commission that needs to be paid to brokers. If the property has a hard time being sold, a rent to own agreement could be a sound way to sell the property later. In addition, rent received with the option fee tends to be above market average.

Typical Contract Terms and Conditions

A well-drafted example of a rent to own contract should include:

  • Option Fee: An upfront, non-refundable fee (usually 1%–5% of the purchase price) paid by the tenant for the right to buy the property later.
  • Purchase Price: Either locked in at the beginning of the agreement or based on a future appraisal.
  • Rent Credits: A portion of each month’s rent (e.g., $200 of $1,500) may be credited toward the purchase.
  • Maintenance Responsibilities: Clear delineation of who handles repairs and upkeep during the lease term.
  • Escrow Terms: If applicable, funds credited toward the purchase may be held in an escrow account.
  • Default Clauses: Specifies the consequences if either party fails to meet their contractual obligations.
  • Due Dates and Late Fees: Detailed rent payment deadlines, late penalties, and grace periods.
  • Financing Requirements: The buyer must often secure mortgage approval before the purchase can be finalized.

These elements ensure both parties are clear on expectations and minimize potential disputes.

Benefits and Drawbacks

A rent to own agreement allows tenants to get an exclusive option that other buyers may not receive. A drawback for sellers is that they must sell the property for less than the current market value if the agreement mandates a set buying price.

On the other hand, rent to own can work in a seller’s favor. For owners with no tenants and no rent to own agreement, potential buyers could lose interest, especially if the market shifts in an unfavorable light. Therefore, the seller would be left with a property that’s difficult to sell and has no cashflow if the property is unoccupied.

Real-World Example of Rent to Own Contract

Here is a simplified example of a rent to own contract scenario:

  • Property Address: 123 Main Street, Springfield, IL
  • Lease Term: 36 months
  • Monthly Rent: $1,500
  • Rent Credit: $300/month applied to purchase
  • Option Fee: $7,500 (applied to purchase if tenant buys)
  • Purchase Price: Locked in at $250,000
  • Maintenance: Tenant responsible for minor repairs; landlord for major structural issues
  • Escrow Arrangement: Rent credits and option fee held in escrow
  • Default Clause: Option fee forfeited if tenant fails to buy by end of term

This structure helps illustrate how a rent to own agreement functions in real life and what components to look for when reviewing or drafting a contract.

Frequently Asked Questions

1. What is an example of a rent to own contract? An example includes a 3-year lease at $1,500/month, with $300 credited toward a $250,000 purchase and a $7,500 option fee applied if the tenant buys.

2. How is the purchase price determined in a rent to own contract? It can be fixed at the start or determined based on market appraisal at the end of the lease.

3. What happens if a tenant doesn’t buy the home? In a lease-option agreement, the tenant can walk away, forfeiting the option fee and any rent credits. In a lease-purchase, they may be in breach.

4. Can rent be applied toward the home purchase? Yes, many contracts apply a portion of the rent toward the down payment or purchase price, often held in escrow.

5. Who is responsible for repairs during the lease? It depends on the contract. Typically, tenants handle minor maintenance while landlords remain responsible for major systems or structural repairs.

If you need to find examples of rent to own contracts, submit your legal inquiry to our UpCounsel marketplace. UpCounsel has a variety of experienced lawyers that will help you draft a rent to own agreement if you wish to create a rent to own program for your property. In addition, our lawyers will help renters understand contract terms and invoke their rights as tenants.