What is a Rent-to-Own Contract or Agreement
A rent-to-own agreement is a type of lease that provides the tenant with the option to purchase the property for a predetermined price after the expiration of the lease. Once a tenant signs an agreement, he or she typically pays the landlord an option fee, which can be refundable, partially or non-refundable, depending on the terms set forth in the lease. The purpose of the fee is to incentivize the tenant to make sure that they fulfill the obligations of the lease and do not default, as refusal to follow the lease could result in a loss of the fee.
Typically, the monthly rent of a rent-to-own agreement is larger than a typical lease agreement to account for the value of the option fee. This provides the landlord with profit while also incentivizing the tenant to follow the lease agreement because they have a greater motivation to avoid defaulting. After the expiration of the rent-to-own agreement, the tenant is afforded a set amount of time to purchase the home. If the tenant does not purchase the home within the allotted time period, the tenant can walk away without an obligation and the landlord can find a new tenant .
There are some notable benefits to rent-to-own agreements for both the landlord and the tenant. In short, such agreements provide an option for tenants who want to own their own home but need time before they can purchase. This can be beneficial for tenants because it provides them the ability to lock in the price of the home while ensuring that the tenant will qualify to purchase the home at the end of the lease term. For landlords, rent-to-own agreements provide a larger rent payment while allowing the landlord to lock in a potential sale. This avoids the cost of having to find and vet new potential tenants if an existing tenant ends up purchasing the property.
It is important to note that because some rent-to-own agreements are essentially a pre-appraisal of the home, you are generally better off agreeing to such an agreement when the housing market is booming. Otherwise, you could end up selling the home for less than what it was appraised at when you created the agreement.
The Crucial Elements of a Rent-to-Own Agreement
Rent-to-own agreements come with various features, clauses and variables that will affect every party involved. The purpose of this post is to highlight the major components found in rent-to-own agreements.
First on the list is purchase price. It is important to set a price. Determining the price upfront allows you to avoid dissatisfying surprises later. A second component that is often tied to the purchasing price is the appraisal. Some rent-to-own agreements allow the purchaser to receive credit for any increase in the appraised value of the property. On the other hand, some agreements require the purchaser to pay any decrease in the appraised value.
Another thing to plan for is the tax implications. IRS Tax Publication 527 gives information on the federal tax aspects of rent-to-own agreements. Keeping records is essential when it comes to taxes. Even when taxes aren’t due, good record keeping habits will help everyone keep track of maintenance, payments, etc.
Someone who’s ready to write up an agreement could benefit from an auto-generated rent-to-own contract, typically offered as a downloadable PDF file. These affordable options save time and allow you to make your own customizations for your specific needs. Many will also try to anticipate concerns by outlining key issues that sometimes cause misunderstandings, such as rent credits and maintenance points.
Pros and Cons of Rent-to-Own Agreements
A rent-to-own agreement may be beneficial to a variety of leaseholders and landlords. For tenants looking for a pure rental but who might also want the option of purchasing the property later, rent-to-own fits the bill. It might also suit both parties well if the tenant is considering purchasing the property within the not-too-distant future. Money that is paid each month can be kept track of and be put toward the purchase price if the tenant wishes to buy.
The landlord benefits from a rent-to-own deal as well when he can be relatively certain of the tenant becoming the owner of the house. He might charge a higher amount of rent than he would receive on a flat out rental. The landlord may also be able to quickly rid himself of his former tenant with a simple agreement that he would be unable to do if the tenant’s lease contained a purchase option. This would also enable the owner to more rapidly move another tenant into place if the one who planned to buy happened to change his mind.
One scenario in which the rent-to-own provision might be beneficial to both tenant and landlord would be in an up-and-coming neighborhood. The tenant might consider moving into the neighborhood as it improves, and the landlord might find a tenant who is willing to take a chance on a neighborhood so that he can avoid potential turn-over. While the initial price of the house might be low, the tenant would be able to make improvements and increase the value of the home in the right circumstances.
A second circumstance where rent-to-own is an option would be in a more established neighborhood where the house is available for rent at a very low price. The tenant does not necessarily want to invest in a home because of the low value. However, if the house is being rented at a price below prevailing market value, the tenant may want the option to purchase when the timing is more favorable.
How to Make a Rent-to-Own Agreement PDF
When considering what information should go into the rent-to-own agreement, consider in particular: rental amount, payment schedule and terms, purchase price option, and whether or not the agreement allows for properly repairing, maintaining, and updating the premises . It is important to have proper legal advice before signing such an agreement. Professional tools and templates are available for you to use to create a professional-looking PDF version of your rent to own agreement.
Legal Aspects of Rent-to-Own Agreements
As with any binding contract, understanding the legal language used in a rent-to-own agreement is important. As the buyer, you need to know what is legally expected of you, and how to protect yourself from potential scams. Even if you plan to move quickly, you should not scoff at the importance of carefully reading and understanding the contract’s legalese.
Rent-to-own has the benefit of being an alternative that may be easier for more people who are unable to get a mortgage. As a seller, you are protected by the legally binding agreement on a specific residence, and you can rest assured that your equity has not disappeared. However, lower income, low credit score, or bankruptcy holds the possibility of potential legal issues that can shut down the process quickly.
Eviction is a possibility for the renter if he/she does not follow the legal terms of the agreement. The same goes for a rent-to-own buyer, who can be forced out of the property should they not keep up their end of the agreement by keeping payments on time. However, terminating the contract early is one of the costs of doing business in this way. It is a risk that tenants and landlords take, understanding the cost could be worthwhile.
One of the biggest legal considerations is making sure both parties know the local rules regarding Fair Housing, which can include such things like source of income or familial status. You can draw up a fair reasonable rent to own agreement, but if there is a no-families-allowed law in your area, you could face legal action down the road. In the past few years, there are a handful of areas where is has been illegal to discriminate against tenants or buyers for assistance programs, such as Section 8 in the US, regardless of whether the program will provide them enough money to pay the monthly mortgage payment.
Rent-To-Own Agreement Templates
Information on where to find reliable templates for rent-to-own agreements (including downloadable rent-to-own agreement PDFs from legal websites) is available online for those with the appropriate resources. Available online, in both free and paid locations, are a variety of rent-to-own agreement templates. Most internet searches return listings of resources that contain free ones. However, there also are a number of paid resources.
Examples of free downloadable rent-to-own agreement PDFs include those offered by Rocket Lawyer and Find Legal Forms. For a nominal fee, Rocket Lawyer will provide access to an interactive rent-to-own agreement maker that asks users to answer questions in order to generate a customized rent-to-own agreement. Find Legal Forms also offers both free and paid rent-to-own forms. Their free ones (which are located on WikiForm), do not require signing up for a membership to the website , but do require answering survey questions.
Just as there are a variety of rent-to-own agreement templates available, there also are numerous rent-to-own resources available online. Many law firms have advice on their websites about rent-to-own agreements and offer either rent-to-own agreement templates or links to rent-to-own agreement templates.
Here are a few websites that specifically offer rent-to-own agreement templates: Free Printable Legal Forms offers a printable rent-to-own template. The site also offers a collection of legal forms, including mortgage forms, rental forms and property steps.
EZLandlordForms is another website that offers customizable rent-to-own agreement templates.
Those seeking rent-to-own agreement templates for a state other than New Jersey should be aware that while the forms may be specific to that state (and similar for many other states), the options for agreement types may be available for most.