A lease-to-own, also commonly referred to as a rent-to-own or a lease option, is an arrangement between a buyer and a seller in which the seller leases a property for a set period of time, at which point the buyer typically has the option to purchase the property outright (sometimes a contract legally obligates the buyer to purchase).
Nearly everything in this type of contract is negotiable. Often, the seller agrees to set aside a portion of the monthly payments toward a down payment or equity in the home.
It’s also important to note that this is commonly used as a short-term agreement — a few months to a few years — and that, at the end of the lease period, the buyer needs to obtain a traditional loan.
So why would either side consider a rent-to-own scenario?
A buyer may need time to put away money for a down payment and/or to build up their credit. Perhaps they’re self-employed, for example, and need a few years’ worth of tax returns to demonstrate income stability to a traditional bank. Or they have less than stellar credit and simply need time to repair it.
A seller might like the idea of locking in a purchase price and collecting monthly payments along the way. Say the two sides agree to a three-year term with a purchase price of $170,000. If the buyer pays $1,000 a month, the seller collects $36,000 and still sells for $170,000 at the end — which, even after expenses, can net the seller a nice profit.
A lawyer who’s well-versed in real estate law is usually the best person to review, if not draw up, the contract. And buyers should keep an eye on building their reserves and credit so they can qualify for a mortgage that will allow them to take ownership at the end of the term.
