One of the most common questions someone has when doing a rent to own or a lease option is what exactly is a rent credit? How do they work, should you negotiate them, and are they refunded to you if you don’t buy the property?
Those are all great questions and before I answer them let’s do a little background on what a rent to own/lease option really is. When doing a rent to own you are given the option to purchase the property (usually at a set price).
Option means you have the option to purchase (buy) the property. So during the lease period you and the owner of the property are in a landlord tenant relationship.
Also during this time, which usually runs in conjunction with the lease you have the right to buy the property from the owner. Typically this is the exclusive right to buy and usually you can buy the property at any time during within your option period.
This is where you are often offered what is called “Rent Credits“. A Rent Credit is not actual money at the time you pay rent, you should think of it as money that is either applied to the purchase price (option price) when you exercise your option (buy the property). I’ve also seen rent credits be used by the owner as a contribution towards closing costs when you acquire your own financing.
Example Lease Option with Rent Credits
Let’s take an example property of $225,000. The owner of the home is offering lease option terms and requires 3% up front as an non refundable option payment. (225,000 x .03) = $6,750.00 option payment which is credited towards the purchase price. Yo have your rental payments of $1,550 a month with a 250.00 a month rent credit providing rent is paid on time. The term of the option lasts for 24 months at which time the option expires. So fast forward 24 months what does it take to exercise your option on the property and own it?
Lease Option by the Numbers
|Locked in Purchase Price||
|– Option Payment||
|– Rent Credits ($250 x 24)||
Cash out Price of
Not a bad deal especially if the home is worth more than your option price.
Most Common Questions on Rent Credits
Are rent credits real money?
Not really. As you can see from the example above with a total rent credit amount of $6,000, that really is just coming off the purchase price. The owner/property manager typically is under no obligation to keep your rent credit in a special account or a lock-box. If you intend on purchasing the home this shouldn’t be a concern (as long as the owner has enough equity to cover it).
Are Rent Credits Refundable?
Rarely have I ever seen a rent credit refundable. This is more like a credit for paying rent on time and owners, landlords, and property managers typically don’t look at this as money set aside. So if you are doing a rent to own and not planning on purchasing the property I would be very surprised if the does refund you any money that have been deemed rent credits.
What is the typical amount of rent credit?
This varies but typically it’s anywhere from $100-500 a month. I’ve even seen rent credits be higher in the early part of an agreement, say $300 the first year, $200 the second year, and $100 the third year. This is typically done to give the buyer more incentive to cash out sooner.
Are rent credits negotiable?
Yes they are. Most owners or property managers who are experienced with lease options will already have this defined but that shouldn’t stop you from asking for more. In my book I’ve included a whole section on getting the best deal when you buy an owner financed home.
If I pay rent late do I still get my rent credit?
Usually you don’t get rent credits if you pay rent late. This is something you should check in your agreement but most that I’ve seen have a clause that says if you pay rent late you don’t get that months rent credit. But that’s not the worst of it, I’ve even seen lease option agreements that state if you ever pay rent late not only don’t you get the credit but you lose your option to purchase as well. This is something to watch out for, I also cover this in detail in the audio book portion of what you see below.
That’s the top questions I’ve been asked about rent credits and rent to own… if you have anymore leave a comment down below.