How Does Rent to Own Work?

A Rent to Own, Rent to Buy, Lease to Own, Lease to Buy is more technically termed Lease Option. In a Lease Option or Rent to Own you are leasing the property for a period of time. This lease is typically the same lease as a standard rental with one addition. You have an option to purchase the property. Thus the term Lease Option.

The majority of Lease Options contain two agreements, One Lease or Rental Agreement and one Option to Purchase Agreement.

Over the last few years many owners, investors, and real estate agents have started offering rent to buy opportunities, and over the last year there has literally been an explosion. This fact alone has gives rise to the many ways to structure a rent to own.

Even though there are many ways to structure a rent to own most contain the following types of items

  • Rental Payment: This is payment just like you would pay if you were just renting the property. All the standard items apply, late fees, and failure to pay will lead to eviction.
  • Option Price: This is the purchase price of the property.
  • Option Payment (down payment): This is an upfront fee that is paid to the person who owns or controls the property. This payment is usually credited towards the purchase price of the property and almost always is non-refundable in the event you don’t exercise your option (buy) on the property.
  • Rent Credits: Rent credits are typically applied to the purchase price but only if you exercise your option to purchase the property. It should be noted that Rent Credits are not actual money that is sitting in a bank account. This is funds that essentially reduce the purchase price or can be used for closing costs when you bring in your own financing.

What Are Some Benefits of a Rent to Own for the Tenant Buyer?

Easy Approval and Term. To move into a rent to own home is typically much easier than the other forms of owner financing. Rent to buy deals tend to be more available as well because they are much easier to understand and structure. Most rent to owns are at least 12 months, some 24 and even some last as long as 48 months. In most cases this should be long enough for you to get whatever credit issues you have resolved. Foreclosure or Bankruptcy read below.

No Obligation to Purchase. With a lease to own you have no obligation to purchase the property, remember it is an option to purchase. This can be a two way street but for many situations this will work in your benefit. Instead of just throwing rent out the window it is better to get rental credits and a locked in purchase price.

Lower Upfront Requirements On average the monthly payment and down (option) payment requirements tend to be less than other forms of owner financing. Also you don’t quite have the responsibilities of ownership until you actually to bring in your own financing.

A rent to own is very common in today’s real estate market. If you are looking for a new home a rent to own has many benefits. You should be aware that unless you are completely prepared you could be quite surprised when it is time to bring in your own financing. There are many gotchas found in today’s Lease Option deals, this is one of the main reasons why I wrote my book.

What are the Benefits for the Owner of a Rent to Own?

The Sailor Family bought this home on a Rent to Own in suburb of Pittsburgh

Up Front Payment Remember the explanation above about an option payment, this payment is typically 1 – 3% of the purchase price. The owner retains these funds when you move in and remember these funds are non-refundable. This for most owners is a big selling point when doing a lease to buy.Retain Taxable Benefits of the Property. There are many tax benefits to owning a rental property. Under most circumstances structuring a lease option does not change this fact and the owner retains some great tax benefits while having someone in the property who has a vested interest to continue to pay rent and pay rent on time.

Better Residents. In most cases the owner knows that someone who puts down a large sum of money and is working on purchasing the property will not only pay rent on time but take good care of the property, after all you will be the owner soon.

Often times it seems that the benefits for the seller out weigh the benefits for the tenant buyer. This isn’t really the case, but you should be aware that as a buyer of a lease option there are certain steps you have to take before and after you move to ensure you have a successful transaction.

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  1. Scott Scanlon
    6 years ago

    Thanks Alberto!

  2. Alberto Notte
    6 years ago

    Thanks for the overview, going to buy your book, thanks!