What is a Rent-to-Own Lease agreement?

A lease agreement with a rent-to-own option entails a standard lease with an additional provision allowing the tenant the opportunity to buy the property. This arrangement is typical among homeowners who wish to generate rental income from their property and potentially sell it to the tenant at a prearranged price. If the owner has no mortgage on the property, they often provide financing.

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Essential components to include in a rent-to-own agreement are:

• Tenant/Buyer Name and Address
• Landlord/Seller Name and Address
• Monthly Rent
• Utilities and Services
• Fees
• Purchase Price
• Closing Date
• Property Disclosures

Owner-financing is often part of the rent-to-own agreement, with the seller holding the primary mortgage. This arrangement gives the seller priority in case of non-payment by the buyer.

Benefits for the seller include:

• Receiving a higher monthly payment
• Taxation on interest only, not on principal (with potential capital gains tax liability if owned for more than two years)
• Avoiding real estate commissions
• Retaining rights to the property in case of default

Benefits for the buyer include:

• Obtaining ownership of the property
• Being able to deduct the interest portion of the mortgage payment
• Having the option to resell the property

Negotiations between landlord and tenant typically involve determining:

• Monthly Rent
• Lease Term
• Security Deposit (subject to state regulations)
• Utilities and Services

Once rental terms are agreed upon, parties may negotiate terms for the option to purchase, including:

• Purchase Price
• Downpayment
• Term of Option
• Option Fee (if applicable)

The lease-purchase agreement usually includes these terms, contingent upon both parties entering into a purchase agreement in “good faith.”

Evaluate the Tenant’s Creditworthiness

• Displaying the cozy.com homepage on the tablet screen, the landlord should provide the tenant with a rental application to gather necessary personal details for conducting credit, background, and criminal checks.

Providers for Background Checks:

• MySmartMove.com – $35
• MyRental.com – $34.99
• RentPrep.com – $18.95

Sex Offender Search:

Utilize the U.S. National Directory to conduct a comprehensive check nationwide on individuals or specific geographical areas.

Confirm the Tenant’s Income

• Using a laptop, the landlord can verify the tenant’s income through various means:

• Bank Statements: Last 2-3 months
• Employment Verification
• Pay Stubs: Last 2 weeks
• Tax Returns: Last 2 years

Upon completing these checks, the landlord should have sufficient information to decide whether to accept or reject the tenant. If accepted, both parties should arrange a meeting.

Execute the Lease Agreement with Purchase Option

• The landlord must furnish a fully filled lease agreement with an option to purchase for both parties to sign. Additionally, they should bring the following:

For the Landlord:

• Access to Property: Keys, fobs, pin codes, etc.
• Mail Access: If applicable

For the Tenant:

• First Month’s Rent
• Security Deposit (if required)
• Prorated Amount: If moving in before lease start date
• Other Fees: Any additional obligations (e.g., pet fees)

Tenant Occupancy

• The tenant may now move into the property, ensuring compliance with the property’s rules regarding timing and procedures. It’s advisable for the tenant to introduce themselves to neighbors upon encountering them on the premises.

Activate the Option to Purchase the Property

• In most rent-to-own lease agreements, an earnest money deposit or “consideration” is necessary. The tenant should inform the landlord of their intent to purchase either directly or through the landlord’s representative.

Execute a Purchase Agreement

• Both parties should engage in a purchase agreement negotiation, addressing the following:

• Financing Contingency: Is the purchase contingent on obtaining financing?
• Inspection Periods: Buyer’s right to inspect the premises by a specified date.
• Negotiating Defects: Addressing any defects found in the residence.
• Conducting a Survey: Verifying property lines and obtaining relevant tax maps.
• Closing Date: The final date for completing the transaction; failure to do so may result in forfeiture of earnest money.

Provide Necessary Disclosures

During discussions between the landlord and tenant within the premises, it is imperative to adhere to state-specific disclosure requirements. To ensure a transaction conducted in good faith, the seller must inform the buyer about any necessary repairs, defects, or other issues concerning the property. Failure to disclose such material defects prior to inspection may sour the buyer’s perception and raise concerns about potential hidden problems.

Lead-Based Paint Disclosure: Mandatory for properties built before 1978, this disclosure must be included with the agreement.

Close the Property Transaction

At the closing stage, the buyer assumes responsibility for ensuring the availability of funds. Typically, this involves a wire transfer facilitated either prior to or during the closing, with the title company verifying fund sufficiency. Subsequently, funds are transferred to the seller, and the buyer receives ownership through the signed deed.

Following the completion of the closing, the buyer presents the newly executed deed to the county recorder’s office. A transfer fee, divided between buyer and seller, is required, and upon recording, ownership of the property is transferred to the buyer.