Elements of a Lease to Own homes for Sale Contract

Elements of a Lease to Own homes for Sale Contract

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In a Lease to Own homes, potential buyers get to move into a house right away, with several years to work on improving their credit score and/or saving for a down payment. 

While many states have their own regulations, and no two Lease to Own homes contracts are alike, someone in a Lease to Own homes agreement typically rents the property for a set amount of time (usually one to three years), after which he or she can purchase the house from the seller. It’s not as simple as paying rent for three years and then buying the house: Certain terms and conditions must be met, in accordance with the contract.

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Option Money: In a Lease to Own homes agreement, the potential buyer pays the seller a one-time, usually non-refundable fee called option money, or option consideration. This gives him or her the option to purchase the house in the future. It is important to note that some contracts (lease-option contracts) give the potential buyer the right but not the obligation to purchase when the lease expires. If he or she decides not to purchase the property at the end of the lease, the option simply expires. If the wording is "lease purchase," without the word option, the buyer could be legally obligated to purchase the property at the end of the lease. Clarifying the wording is one of many reasons buyers should have the contract vetted by a real estate attorney before agreeing to it.

The size of the option is negotiable. There's no standard rate. It typically ranges between 2.5% and 7% of the purchase price. In some (but not all) contracts, all or some of the option money may be applied to the purchase price at closing. That's a valuable clause. Consider that if a home has a purchase price of $200,000 and a 7% option consideration, the buyer would need to pay $14,000 up front.

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Purchase price: The contract will specify when and how the purchase price of the home will be determined. In some cases, the buyer and seller agree on a purchase price when the contract is signed often at or higher than the current market value. In other situations, the buyer and seller agree to determine the price when the lease expires, based on market value at that future point in time. Many buyers prefer to “lock in” the purchase price if possible, especially in markets where home prices may be increasing.

Rent: During the term of the lease, the potential buyer pays the seller a specified amount of rent, usually each month. The lease term is negotiable but frequently ranges between one and three years. In many contracts, a percentage of each monthly rent payment is applied to the purchase price. For example, assume the contract states that the buyer will pay $1,200 each month for rent and that 25% of that will be credited to the purchase. If the lease term is three years, the buyer will earn a $10,800 rent credit to apply toward the purchase ($1,200 x 0.25 = $300; $300 x 36 months = $10,800). Often, the rent charged by the seller will be slightly higher than the “going rate” for the area to accommodate the rent credit the buyer receives.

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Maintenance: Depending on the terms of the contract, the potential buyer may be responsible for maintaining the property and paying for any repairs, homeowners association fees, property taxes and insurance. Because the seller is ultimately responsible for association fees, taxes and insurance (it’s still his or her house, after all), the seller may choose to cover these costs. Even in that case, the buyer still needs a renter's insurance policy to cover losses to personal property and provide liability coverage if someone is injured while in the home or if the buyer accidentally injures someone.

Be sure that maintenance and repair requirements are specified in the contract. Maintaining the property – mowing the lawn, raking the leaves and cleaning out the gutters – is very different from replacing a damaged roof.

Purchasing the property: If the potential buyer decides not to purchase the property (or is unable to secure financing) at the end of the lease term, the option expires. The buyer forfeits any money paid until that point, including the option money and any rent credit earned. If the buyer cannot purchase the property but has a legal obligation to (as stated in the contract), legal proceedings may be initiated.

If the buyer wants to purchase the property, he or she typically applies for financing (i.e., a mortgage) and pays the seller in full. According to the terms of the contract, a certain percentage of the option money and rent paid may be deducted from the purchase price. The transaction is completed at the closing, and the buyer becomes a homeowner.

Ideal Candidates for Lease to Own homes Bad Credit Loan Mortgage May Be The Answer Your Looking For Do you dream of one day owning your own home but your current financial situation makes you wonder if that will ever be possible?  If you have a bad credit rating or even worse, have gone through a bankruptcy, then your dream home may be just that - a dream!  But it isn't impossible to get that home, you may just need to look a little harder for a loan and you may need to take a loan that costs a little more, but you do have options with a bad credit loan mortgage.  You can still purchase your dream home even if you have a bad credit rating through this type of mortgage.  

There are many different reasons why a person develops a bad credit rating and sometimes it can be due to circumstances beyond your control.  A bad credit score might be the result of medical bills, job loss or divorce, reasons that are unfortunate and unavoidable, but they can have a big negative impact on your credit history.

When you have a poor credit rating and your only option is a bad credit mortgage then you need to forget about conventional financing and try to get a VA, FHA or USDA loan instead.  If the home that you are looking at buying is in a rural area and you have virtually no money to put down on a loan, then a good option for a bad credit loan mortgage is a USDA loan.  A USDA loan will often cover 100% of the cost of the home although it isn't as common as it once was.

Another option is to apply for a fixed rate loan and you can do this through the USDA rural housing program. A rent-to-own agreement can be an excellent option for people who want but are not financially ready to become homeowners. A rent-to-own agreement gives them the chance to get their finances in order (by improving their credit score and saving money for a down payment, for example) while “locking in” the house they’d like to own. If the option money or a percentage of the rent goes toward the purchase price, they also get to start building some equity.

To make rent-to-own work, potential buyers need to be confident that they’ll be ready to make the purchase when the lease term expires. Otherwise, they will have paid the option money which could be substantial and a premium on rent for 12 to 36 months, with nothing to show at the end.

If there’s a good chance would-be buyers still won’t be able to qualify for a mortgage or secure other financing by the time the lease expires, they should instead continue renting (with a “normal” lease), building credit and saving for a down payment. Then, when they’re ready, they can choose from any home on the market in their price range.

The Bottom Line
A rent-to-own agreement allows potential buyers to move into a house (maybe even their dream home) while getting their finances in order to purchase the home several years in the future. It’s not without risks since they could end up losing money if they don’t (or cannot) buy the property when the lease expires. It’s vital for buyers to read and understand every word of the contract and know exactly what they’re getting into. For example, if the contract can become void if the buyer is late on one payment he or she needs to know that in advance. Or if the seller can evict the buyer for not doing repairs, that needs to be understood before committing. A rent-to-own agreement is a legally binding contract that often includes complicated language. Even if a real estate agent assists with the process, it is essential for buyers to consult with a qualified real estate attorney who can clarify the contract and their rights, before signing anything.



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