6 Things to Know Before You Sign a Rent-to-Own Contract

Rent-to-own is a phrase that's thrown around for everything from houses to furniture these days. So, what does rent-to-own mean in real estate? And more importantly, what do you need to know about a rent-to-own contract before you sign on the dotted line?

What does rent-to-own mean?

Also known as a Lease option, a rent-to-own contract allows renters to lease a property and, at the end of the lease (usually one to three years), have the option to purchase the home at a predetermined price. Ideal candidates for a rent-to-own option are potential home buyers who dream of ownership but are also concerned they haven’t saved up enough cash for a down payment.

As a renter, you must be cautious before you sign a rent-to-own contract. There are many stipulations within a contract, so make sure you understand the lease options.

Things to know before signing a rent-to-own contract:

 
1. Determine a fair sales price. Under a lease-option contract, you're the only person who has the option to buy the property during the stated period. Although you can usually buy the home at any point during the term of the contract, the sales price is locked in. You may have locked in to a great deal if the home goes up in value during the lease term. On the other hand, you could end up paying more for the home if it depreciates and a set price was locked in for a higher amount than what the home is worth when your lease-option is up.

2. Complete a home inspection and document any necessary repairs. As with any home purchase, the condition of the home should be reflected in the price. Take photos to document the condition.

3. Verify whether there are any liens against the property that will affect your home purchase. You don't want any argument over who owns title to the home (this is where a Preliminary Title Report comes in handy).

4. Spell out the exit clause. Make sure the contract specifies exactly what happens if you don't exercise your option to buy the home at the end of the lease. (this may entail you forfeiting your option money).

5. Ensure all payments on the property are made. Make sure mortgage, taxes and insurance responsibilities are clearly spelled out.

6. Consult a professional. As always when purchasing real estate, it’s important to hire an expert to help you navigate the process and protect your interests. Someone seasoned in rent-to-own contracts can ensure you've specified everything in writing so that you understand the contract and, ultimately, complete a successful transaction.

Source: Realtor.com