A lease-to-own agreement, also referred to as a rent-to-own or lease option, provides flexibility in housing agreements. In a lease-to-own agreement, the tenant/buyer has a standard landlord-tenant in place with an extra option providing for the tenant’s right to purchase the property. However, the terms of a lease-to-own agreement can vary greatly, as some agreements may require the tenant to purchase the home at the end of the lease.
Typically, the standard lease is for a term of a few years at the fair market rental price. In addition, the tenant/buyer will typically pay a lease option fee between 1-5% of the purchase price. Landlords/sellers will also often offer a “rent credit” of some portion of the monthly rent reducing the ultimate purchase price of the home. Or the landlord/seller may require the tenant/buyer to pay a monthly “rent premium” that is put into escrow to be put towards the eventual purchase of the home. Because there can be great variability in the terms, it is important to have an attorney’s assistance to negotiate the lease-to-own agreement terms.
A lease-to-own contract can be attractive to both homebuyers and sellers. Like a contract for deed, a lease-to-own agreement may provide an opportunity to purchase a home for an individual who has difficulty qualifying for traditional financing. For buyers, a lease-to-own agreement provides an opportunity to give the tenant time to live in the home and determine if they really want to purchase later. Additionally, if the home increases in value during the rental period, the tenant/buyer has an advantage based on the prior agreed upon purchase price.
For sellers, a lease-to-own agreement provides some flexibility as well. Although potentially dealing with a buyer with subpar credit or a bankruptcy, a lease-to-own agreement provides an incentive for tenants to maintain the home during their tenancy, in contrast to a regular renter. Also, depending on the market in the area, a lease-to-own agreement may provide an option for a seller who has experienced difficulty selling the home. Also depending on the agreement, if the tenant/buyer backs out of the sale, the landlord/seller may be able to keep the fees and premiums paid.
However, there are some disadvantages to this type of agreement for the seller. The responsibilities for maintenance and upkeep of the home should be specified in the agreement. These are often referred to ongoing expenses. Even if the parties agree the tenant will pay for ongoing expenses, the landlord remains responsible for things like property taxes as the record owner of the property. Additionally, if the fair market value of the home goes up significantly during the rental period, and the parties have not contemplated this in the agreement, the seller may be at a large disadvantage when the tenant/buyer exercises the option to purchase.
If you are considering a lease-to-own agreement as either a seller or buyer, contact O’Keeffe O’Brien Lyson Foss in Fargo, North Dakota to discuss your options with an experienced real estate attorney or call 701-235-8000 or 877-235-8002.