A lease-to-own or rent-to-own contract is a unilateral agreement, as the seller is the only party required to take action when the rental period expires. If the tenant-buyer decides to purchase the home, the landlord seller will have to sell it in the end.
Unlike lease-purchase agreements, the prospective buyer isn’t required to buy the property. To convince the tenant-buyers to make the purchase at the end of their lease, rent-to-own agreements include various incentives. They can lose the option fee and rent premiums by deciding not to buy the property.
That’s why it is important to negotiate and understand your lease-to-own contract before signing it. Let’s throw some light on the key parts of these agreements that can be negotiated like closing time frame, purchase price, lease option, etc.
What Parts of Lease-to-Own Agreements Are Negotiable?
From monthly rent and option fee to purchase price and property repairs, there’s much to negotiate when it comes to rent-to-own contracts. Almost everything is negotiable in your agreement. However, there’ll be very little to negotiate after signing the contract.
Rent Credits
Please note that a portion of your rent payments will go toward the down payment while you rent the property. It will be collected in an escrow account as long as the landlord eventually sells the property. This is actually your rent credit.
It should not be confused with a standard lease. While rent credits are not necessary, they are aimed at incentivizing the buyers to purchase. What’s more, they can be helpful for both the sellers and buyers in some situations.
Option Fee
As the name suggests, the buyer pays this fee for the option to purchase. It is a non-refundable fee regardless of the way they negotiate their rent-to-own contracts. Think of it as a security deposit that is required to start the process.
While the option fee is usually from 2% to 5% of the property value, it can be up to 10% in some cases. Sometimes the material possessions like boats and cars can be used to pay the option fee. Other times, some services can be exchanged for this one-time fee.
Whatever the case, you should try to make the landlord be more confident about the purchase. Negotiate a lower option fee. Some sellers ask for higher option fees to compensate for the time they waste while leasing the property and real estate damages that may occur during this period. The larger fees also discourage rent-to-owners from walking away.
Many sellers avoid these deals because they have a hard time finding another tenant or buyer. Try to reassure the landlord/seller that you’ll care for the home and purchase it when your lease runs out. It’s in your best interest to do so. Otherwise, you will end up moving out and losing the option fee.
Closing Time Frame
Almost all the sellers want to get the rent-to-own homes off their hands at the earliest opportunity. The homebuyers, on the other hand, often try to prolong it to close early if needed. Buyers with a bad credit score want their time frame to be longer, thereby getting some extra time to achieve eligibility for a mortgage.
You need to negotiate the closing time frame with the seller at the beginning. Bear in mind that the lease term can’t be shorter than one year. While the rent-to-own term is up to 3 years in most cases, it can be as long as the seller and buyer agree to. You’re advised to determine it before entering into a contract anyway.
Purchase Price
The purchase price can be set at the point of closing or it can be fixed at the beginning. Even though this price matters, it is not as important as when purchasing a house outright. That’s because it’s something the buyer doesn’t have to pay if he or she chooses to walk away from the property.
Unlike the option fee, premium payments, and set time frame, the purchase price doesn’t impact rent-to-owners certainly and immediately after agreeing. That’s why many tenant-buyers delay setting it until when they close.
However, it doesn’t mean it should not be your negotiation focus at all. The last thing you want is to end up with a terrible deal. You may want to get fair market value (FMV) to avoid suffering tremendous loss. If so, make sure your agreement says that the house will be priced at FMV at the time of purchase.
Property Repairs
Last but not least, you should make it clear who is responsible for property repairs and damages. Most landlords pay for repairs during the lease period. Who owns the property, he/she is supposed to pay for repairs.
Even so, it is critical to determine the responsibility of every kind of property repair when negotiating the contract. That will save you the hassle of arguing about responsibilities later on and hiring an attorney or a law firm if required.
Get a home inspection before signing the agreement. It’s worth it. Don’t move in until the seller pays for significant repairs. Maybe you will need to fix problems with air conditioners or restore the roof completely.
Why does it matter? Not every seller is willing to make expensive home repairs. Although it’s very uncommon, some sellers don’t want to make any repairs on their own. Therefore, you need to take into account all the repair costs when setting the purchase price.
Repairs may also occur after purchasing the house. It happens from time to time. While the buyers are generally responsible for smaller repairs, be sure to negotiate the maximum cost of repairs you’re liable for.
6 Questions to Ask Before Entering into an RTO Contract
There are some things you need to pay special attention to before signing a rent-to-own contract. They need to be clarified beforehand. This will help you avoid confusion and possible troubles down the line.
Here are some questions about your rent-to-own agreement you need to ask in advance:
- What are my rent premiums and monthly rent going towards?
- Who will pay for homeowners insurance, maintenance, and property taxes?
- Does my lease-to-own contract determine the purchase price?
- Can my contract become void and under what conditions?
- What portion of the option fee and rent premiums will go towards the down payment?
- Will I need a mortgage or will it be financed by the seller?
The answers to these questions will help you get a better understanding of your lease-to-own contract and make an informed decision. It’s of great importance to read through the agreement and understand its key parts before signing it. Negotiate everything from the purchase price and the option fee to property repairs and rent credits. Turn it to your benefit!
