Rent-to-own contracts typically refer to lease agreements for personal property, such as rent-to-own furniture. Real property rent-to-own arrangements are known as residential leases with options to purchase contracts. Generally, state laws establish the respective rights between renters and their landlords who enter into lease-purchase options. Although these types of agreements offer flexibility to both parties, they also carry some legal risks.
Most commonly, retailers of tangible personal property use rent-to-own contracts if they lease electronics, furniture, appliances or other common household items. These lease agreements provide consumers with the option of purchasing their rented items after a specific length of time. By the time consumers have the option to purchase, they have spent a significant sum of money renting the items. In real estate transactions, rent-to-own contracts allow renters to purchase their homes by a specific date and they may receive credit for the rent they have already paid toward a down payment to purchase their homes.
Declining or Improving Market Conditions
Rent-to-own real estate contracts provide renters with the option of purchasing their rental properties within fixed terms and prices. Although rent-to-own transactions provide renters with many flexible options, there are many legal problems that can occur in rent to own transactions -- especially with the lack of federal laws governing these transactions. Lease- or rent-to-own contracts for real estate require parties to negotiate the selling price of their property before they enter into their contracts. Once they lock in a contract sales price, sellers risk selling their homes for more if home prices rise, while buyers risk the further decline of home values. They may not have an opportunity to evaluate market conditions before exercising their options to purchase.
Landlord and Tenant Problems
Both lessor and lessee are required to include the essential terms of their real estate contracts. Because the parties in a lease option contract take on the role of landlord and tenant, their relationship can deteriorate if a tenant fails to pay his rent on time or his landlord neglects providing necessary repairs.
Once a landlord and tenant experience problems during tenancy, these problems can lead to an uncomfortable and stressed relationship during the home purchase stage. If a tenant decides against purchasing her landlord's property because of the deteriorating relationship between them, her landlord may not have another opportunity to sell his property. Moreover, if he had other offers from third parties to purchase his property, he would have foregone those opportunities to sell.