The primary components of a rent to own transaction (also known as a lease to own transaction) are the rental term, the purchase price, the upfront deposit and the monthly rent credit. A Tenant or Renter (also referred to as “Tenant-Buyer”) and a Landlord (also referred to as “Landlord-Seller”) enter into a lease agreement (typically 12 to 36 months) that gives the tenant the option to purchase the home at a previously agreed upon price. Sometimes you will hear a rent-to-own transaction referred to a “lease option” for this reason.
If the Tenant-Buyer chooses to purchase the home, a standard purchase transaction is executed. If no purchase takes place, the house is vacated at the end of the lease term, and the owner keeps the tenant-buyer’s non-refundable deposit. The Landlord-Seller may also retain a portion of the Tenant Buyer’s rent credit in the event of damage to the home (just the same as a security deposit when you’re renting a house).
A rent-to-own contract outlines the pre-determined purchase price, upfront down payment, length of lease, monthly payments, portion of monthly payments that go towards ownership (the “monthly rent credit”), escrow procedures, amount and timing of broker commissions and other terms that are customary of standard lease agreements.
The Tenant-Buyer can pay for a home inspection at beginning of the contract and/or immediately prior to purchasing the home. As part of the negotiation, the buyer may request other inspections such as, but not limited to, pest report and roof certification before entering into contract at Tenant-Buyer expense.
The Tenant-Buyer is usually responsible for home repairs and maintenance. The Landlord-Seller retains title and remains responsible for mortgage payments, homeowner insurance and property taxes during the lease portion of the transaction.
The rent-to-own contract outlines late payment penalties and eviction process if buyer does not pay rent.
See our rent to own roadmap to home ownership >