If you're considering renting to own a property, your initial proposal to the home owner will specify the terms under which you'd like to occupy and someday buy her house. When you're writing it, remember that your proposal probably isn't going to be the actual agreement that you end up signing. As such, it's a good negotiating strategy to write a proposal that is slanted a little bit in your favor so that you can negotiate an agreement that is good for both parties.
Research rents and purchase prices in your area. Real estate research web sites frequently have both information on recently sold properties and on rents in the area. You can also get help from real estate agents or from a professional appraiser.
Propose a purchase price for the property that falls at the low end of the reasonable range for the property. For instance, if similar properties have sold for $95,000, $125,000, $127,000 and $135,000, you'd probably specify a purchase price that is somewhere between $120,000 and $125,000. This might be a little bit low -- since the $95,000 sale is probably an outlier -- but you can justify it in a negotiation.
While you're proposing the purchase price, specify that it be locked for the term of your lease option. That way, if the house goes up in value, you won't have to pay more and may walk into extra equity.
Set your rent at the low end of the range. For instance, if comparable properties are renting for $995 to $1095, you'd want to set your rent around $995. Add the amount that you want to have going to your purchase every month to the rent. For instance, if you want to pay $250 towards the purchase, specify a rent of $1,245 with $250 allocated towards the purchase price.
Delineate your option fee and security deposit. Your security deposit is like any other security deposit on a rental. The option fee is additional money that you pay up front that gets applied to the purchase price. The more you put down, the less it will cost to buy the house, but the more you will lose if you don't purchase the house. Option fees vary, but offering 1 or 2 percent of the home's option purchase price is probably a good start, knowing that you may end up paying more.
Specify who will be responsible for the house's expenses while you're under your lease option. The more that you can get the landlord to pay for, the better off you'll be. For instance, you may choose to have her pay the property taxes, insurance and major repairs while you cover landscaping and utilities.
Request a reasonable option length. Remember that you'll need to get a mortgage and potentially save for a down payment to buy the house out, so you may want to leave enough time to amass some money and, if necessary, clean up your credit. While lease option lengths vary, you can probably ask for five years.
Define how your interests will be protected. For instance, you may require that your option fee and extra monthly payments be put in a separate account to keep them safe. If the owner has a mortgage, you might also want to include language that lets you verify that the mortgage is being paid and that, if it isn't, you can send your rent to the lender to pay it.
Write in the right to sell your option prior to its expiration date. While you probably won't be able to get the owner to give your money back if you can't buy the house, writing in the right to sell it may let you recover some of your costs.
Specify how the final document will be written and how you can review it. Someone will need to come up with a legal document that covers your lease and your option. Unless your attorney writes it for you and it gets signed without changes, you'll wan to have an attorney review it before you sign it.
Having an attorney help you with your proposal and with the final agreement can help you to protect your rights. Compared to the amount of money that a rent-to-own arrangement involves, the fees are relatively small.
- The Mortgage Professor: Lease-to-Own House Purchases
- ForSaleByOwner.com: The Basics on Lease-Option (Rent to Own)
- Frascona, Joiner, Goodman and Greenstein, P.C.: Installment Land Contracts and Lease/Option Agreements - DON'T DO THESE! Use an All-Inclusive or "Wrap" Deed of Trust Instead
- Cheri Elliott: The Risks of Leasing a Home with an Option to Purchase
- Having an attorney help you with your proposal and with the final agreement can help you to protect your rights. Compared to the amount of money that a rent-to-own arrangement involves, the fees are relatively small.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.