A rent to own contract for a home or any
other form of rental property (also referred to as a
lease to purchase or lease to own purchase) is one
in which a lease is combined with the option to buy
the property within a certain amount of time at an
already agreed upon price. Typically, the
tenant pays an option fee of 1-5% of the purchase
price, which is deducted from the purchase price of
the property (similar to a down payment). The
tenant pays monthly due plus a rent premium. If the
rent to own option is not exercised within the
predetermined length of time allowed, the tenant
losses both the option fee and the rent premium.
A rent to own contract has six major items:
- Purchase price - determined by the market,
but is negotiable.
- Monthly rental payments - subject to market
conditions, but are also negotiable.
- Option period - the amount of time the buyer
has to exercise the rent to own option.
typically in years.
- Rent premium - the monthly amount that is
above and beyond the normal monthly payment and
is credited to the purchase price.
- Option fee - the set amount the tenant pays
the seller, typically 1-5%.
- Rent credit - this is amount is the same as
the rent premium and is credited to the purchase
price of the home.
A rent to own example:
Assume a landlord has a house worth $100,000.
Assume market conditions in this city puts monthly
rent at $500/month. A person who wants to rent to
own this home might pay $700/month and receive $200
per month in rent credit. The option fee in this
example is $2,500. Over a 3 year rental
period, the tenant would have earned $7,200 in rent
credits. Combine the rent credits and the $2,500
option fee and the total accumulated amount earned
by the tenant is $9,700. Therefore, at the end
of the option period, the renter would have a
balance of $90,300 instead of $100,000.
Benefits of rent to own:
The monetary advantages of rent to own contracts
are quite substantial for buyers who don't have a
high enough credit score to purchase the home and/or
have enough money saved for a down payment.