Understanding Rent-to-Own ContractsDecember 02, 2017
You and your landord are likely to be more satisfied with the outcome of your rent-to-own contract when you both completely understand all of its details. Rent-to-own contracts include several details that are different from regular lease contracts. One key difference of a rent-to-own contract from a regular lease is that the landlord isn't under obligation to make repairs or routine maintenance to the property.
This could be the case when the landlord lives far from the property or sees your interest in the property as a long term investment in which you would be solely responsible for its upkeep.
A Standard Rent-To-Own Agreement
In a rent-to-own contract, your name and the name of your seller/landlord should be stated in the contract and signed and dated by the two of you. It's also important to include the name of anyone else who will live on the property in the rental agreement.
A legal description of the property should be included in the contract, including the full address and parcel number. Adding the parcel number will remove any confusion of the property's location. You can obtain the parcel number from the local property tax assessor’s office, or look up the property's address on the tax assessor’s website.
The following provisions for a rent-to-own contract should include everything you'd find in a typical property rental agreement:
* The lease period should have a start and end date including a clause stating if that period can be extended and under what conditions.
* When the rent is due, provide a payment address, list what types of payments the landlord will accept, and any late fees checks returned or payments made late.
* State the amount of the security deposit and make it refundable to the tenant if the property isn't damaged and you decide to move out.
*If pets and which types are permitted, whether smoking is permitted, and a description of all amenities and availability of parking spaces.
* A description of which utilities are covered by them and which utilities are your responsibility.
*The circumstance and terms you can sublet the property, and the conditions and number of days you have to correct an issue before being evicted.
The contract should include under what circumstances you forfeit your rent credit and deposit aside from your choice not to buy the property, such as:
1.Vacating the premises
2.Destroying the property or failing to pay rent as agreed
The option provisions can make renting to own the property more favorable to you than just renting. It's crucial that details such as:
* Your rent and rent credit, your option deposit (under some agreements, you might pay only an option deposit or only a rent credit, not both), and the exclusive right to purchase the home at the end of the lease period be put all in writing.
These details offer a protection to you if you will treat your property as a long-term investment. The seller can't let anyone else buy the property during your rental option period.
Give Yourself Time to Workout Potential Problems
Make sure your option period gives you a chance to correct potential problems, such as lack of down payment and a poor credit rating that could disqualify you from getting a mortgage. Eighteen months to three years is a practical time period to work out these details.
Moreover, the seller should provide a notice of how many days you intend to buy the property and the deadline your option to buy expires. As an option, you could buy before the expiration of the lease if your financial situation improves sooner than expected.
Make sure that your seller maintains homeowner's insurance, doesn't take out new loans against the house, and stays current paying their property taxes.
The purchase portion of a rent-to-own agreement resembles the wording of a regular real estate purchase agreement. A standard contract for real estate purchase agreements may be required by your state's laws, and needs to be flexible enough to negotiate fill-in-the-blank sections.
Purchase Price Statement of the Property
Your property should provide a reasonable purchase price based on similar properties within the market. The seller may decide raise the property's price by 5 to 10 percent higher to include price appreciation during the rental period.
Remember, that the value of the property could also decrease during this time frame. If this should happen, you may decide not to pay the price you originally agreed to.
However, the bank might not lend you enough money in order to close the deal. Unless your contract provides an alternative, you'll lose your option to buy, as well as your option deposit and rent credit.
Agree to a Firm Purchase Price
The housing market is constantly fluctuating. Agreeing to a firm purchase price might be the only practical approach to take when you want to buy your property for less than its asking price. For example, you might be able to buy a property worth $210,000 for $200,000 or its appraised value whichever is lower.
Although the seller may have a problem lowering their price out of concern they'll be unable to pay off their mortgage or take a loss on the property, the price will be fair and the appraisal won’t prevent you from buying regardless of whether or not the market increases or decreases.
Ideally, the purchase portion of the contract should also provide you with protection if the seller reneges on the contract. Therefore, the contract should require the seller to:
1. Return your option deposit and rent credit.
2. Pay you an additional sum if he or she doesn’t hold up on their end of the agreement when you’re ready to buy.
These types of clauses could actually deter to the seller's from changing their mind at the last minute. You can also add a clause that gives you the option to get your money back if a property inspection reports the property to be in poor condition or if the house title isn't clear.
Use an Escrow Service
Hire an escrow service to protect yourself. An escrow service serves as the financial third-party go-between for you and your landlord. It's a practical solution to secure your option deposit and monthly rent credits until you buy the property. When you're ready to buy, this money can be returned to you to put toward your down payment and closing costs. If the purchase option deadline expires and you decide not to buy, the escrow service will surrender your funds to the landlord. It will return money to the correct party if either of you violates your end of the agreement that can’t be settled between you.
It's the wise course not to sink a huge investment into the property (e.g. replacing the plumbing, hardwood floors) until you actually buy it. Be leery signing a rent-to-own contract when the landlord doesn't agree to pay for maintenance or repairs. The contract should also clearly spell out which appliances and fixtures come with the house if you decide to buy it. Finally, make sure you understand the wording, obligations of the landlord, and your responsibilities as a tenant before you agree to or sign anything stated within a rent-to-own contract.
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