The Ins and Outs of the Rent-to-Own Lease

Handing Over the Keys

Chances are, you’ve probably heard someone utter this question at some point in your life: “Why throw your money away on rent when you could use that money toward a mortgage?” The truth is, there are many reasons why folks choose to rent an apartment rather than purchase a home. Maybe they don’t like the idea of maintaining a house or perhaps they want to have the flexibility to move without the hassle of selling their home first. Whatever the reason, these people are perfectly content handing over a rent check every month knowing that (in theory) everything will be taken care of at the apartment.

But what about the folks who would prefer to buy but just don’t have the money for a down payment or are currently looking to lease but would like the option of buying the home in the future? Recently, renting or leasing a home with an option to buy has become a common transaction. To help you understand the ins and outs of this option, Gary Foreman of Fox Business has provided the following list of things you need to know:

Do Your Homework: The purchase price of the home is negotiated upfront and stated in the lease agreement. Be sure to get a qualified inspection and appraisal before signing the lease. If the seller isn’t going to finance, make sure you would likely qualify for a mortgage when the time comes to complete the purchase.

Never Assume: Don’t assume you can lease/purchase without a down payment. Some contracts, including homes that are seller financed, will require a down payment when the purchase option is exercised. This down payment is negotiated between you and the seller.

You Might Pay More: Expect to pay more each month then if you were just renting. A portion of your monthly payment may contribute to your down payment or the cost of having an option on the property.

Be a Bookkeeper: Keep detailed records of every transaction – a loan officer may ask for it later – and be sure to write a separate check for the down payment. Your bank will want to know this information.

Call in a Professional: Have an experienced real estate attorney draw up or review the contract. There are several ways to legally set up a lease with an option to buy. Don’t DIY – leave it to the professionals.

Know the Risks: Make sure you understand the contract, your responsibilities, and the various outcomes. Also know that housing prices can rise and fall which means your option price could be higher (or lower) than the house is worth in a few years.

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