How Does Rent to Own Work

How does rent to own work? Rent to own, also known as lease option, is an option available to those that cannot procure a mortgage. It does usually require quite a sum of money for a down payment. Some homeowners use a percentage to calculate the down payment,  while some may use a number that is popular for the state they live in; for example, in Florida, $7,000 is a very popular number.

Who Signs the Contract?
The rent-to-own contract is signed by the homeowner and the buyer. The contract is actually in two parts. One part is the lease, and the other part outlines the terms of the lease option. The lease is generally a standard lease for your state and spells out the amount of the rent and what maintenance is the renters' responsibility. Unlike a straight rental, renters in a lease option are responsible for any repairs, including appliance repairs.

The lease option portion of the contract, which often is a separate contract, dictates terms of the lease option, including the monthly rent and monthly payment, the amount of the down payment and what portion of the rent, if any, is applied to the principal.

A typical lease option will break down like this:

Purchase price: $159,900
Down payment:     7,000
Monthly payment: 1,385

The lease option will specify that the down payment plus a certain amount of the monthly payment, for example $85), will be applied to the principal. It also specifies when the lease option ends. When the renter exercises his option, he finances the purchase price minus the down payment and minus $85 x 24 months, in the case of a 2-year option. He would finance $150,860 in this example.

What Happens when the Option Ends?
If the renter cannot finance the home or but would like to stay in the home, the homeowner may choose to extend the option. This will be spelled out in the terms of the lease option agreement. Most lease option agreements state that the homeowner may change the purchase price of the home should the renter not exercise his option.

If the renter decides he does not want to stay in the home, she forfeits the down payment and the monthly amount applied to the principal.

If you are not familiar with leases and other contracts, always have an attorney review the lease and the lease option. Make sure you understand the ramifications of opting out of the contract at the end of the lease term. 

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