Residential

A Guide for Rent-To-Own Homes

If you are planning to buy a house you may have heard of the phrase rent-to-own homes. This claims to allow buyers to buy a house that they may not have been able to afford. If you are interested in this concept continue reading on to find out more. 

Photo of the outside of a condo building

What exactly are rent-to-own homes?

To start, there are several different ways someone can buy rent-to-own homes. Every situation is different. But usually one of two things is happening:

  1. A seller is having trouble selling their home but needs to at least receive some rent.
  2. Some sellers want to maintain the asset for either financial or personal reasons so they allow longer terms to the potential buyer.

Most of the time there’s a commitment on the part of the buyer to purchase the property at the end of a specific time period. They need this time to be in a better financial position.

Sometimes there’s no commitment but the option is on the table. There are various reasons why a rent-to-own agreement is an attractive option for both parties. It’s all in the details.

How does it work?

The following explains how rent-to-own works and the motivation behind each party. It will also give you information on the ways that the agreement can be structured. 

The buyer is not able to get a mortgage

It begins with a potential buyer who wishes to own this place. When they do their due diligence, they learn that their bank will not approve them for a mortgage. Maybe other lenders give them the same response.

Buying a home the traditional way is no longer an option. But if this buyer believes they can afford a home in time, then a rent-to-own agreement could work out for them. 

The owner gives an alternative

Once the buyer chooses their favorite of rent-to-own homes they contact the seller. This seller believes a rent-to-own scenario might be to their best interest as well.

The seller gives some terms to the potential buyer, such as security deposit, monthly rent, time frame and more. In this first set of paperwork will be the official purchase contract or a referenced contract with terms both parties will adhere to if the buyer chooses to buy at the end of their rent period.

A rental agreement along with cash for the choice to buy

All parties sign the documents. If all parties agree, there could be a penalty is the buyer uses the entire rent period but doesn’t choose to purchase.

Everything is negotiable and there can may different aspects to the deal. This means is very important for both parties to have an expert real estate agent on their side.

Notable Terms and Conditions

There are various terms and conditions which can be included in the rent-to-own agreement. All parties need to fully understand them before they sign anything. The main terms are:

  • Rental rate (monthly)
  • Term of the rental agreement
  • Any credits from rent paid to go towards purchasing the home
  • Terms of purchase if executed by the buyer (including purchase price, inspections, etc.)
  • The expiration date of this option
  • Penalty for breaking the agreement early
  • Whether the agreement is assignable

There are other terms and conditions but these are the main ones. As you can, going through a rent-to-own (or lease option as it’s often called) is a complicated. You definitely need to be careful. You might want to access rent-to-own properties so that you can get an idea of what is available in your area. Happy hunting!

About the author

Tre Pryor, Editor-in-Chief

Tre Pryor is the recognized expert Louisville Realtor who can:
  • List and sell your current home in Louisville,
  • Help you purchase your next Louisville home, or
  • Guide you in your relocation to Louisville, Kentucky
» Contact Tre now!