A rent to own or lease option is a solution for some buyers and sellers… not all.  Rent to own also known as a lease option is not always a well understood process.  Comprising of two main components:

1.    Lease/Rental Contract

2.    Option to Purchase

Loosely or poorly structured lease options can leave the seller, buyer or both in the middle of a misunderstood legal contract.

A properly executed lease option should consist of at minimum:

1.    A Lease/Rental agreement that includes a rental price, rental period and who pays for and is responsible for upkeep, existing mortgages, taxes etc. during the rental period.  It should clearly detail what amount of the rent, if any, is to be used as future credit against the purchase price or down payment and what happens to these funds if the buyer does not exercise the option.   A reference to the separate Option Agreement.

2.    An Option Agreement that clearly details the Option period, the amount of Option Fees and what happens to the fees if the buyer exercises the option or walks away.  The option binds the seller to sell if the option is exercised.  The buyer has the option to proceed within the time frame specified or walk and loose any option monies.

A detailed consideration of exposure is always in order with this type of contractual agreement.  In general both parties stand the potential of great up and down sides depending on the direction of the market.

Lease options without a sales price, in an up market, are potentially one sided (in favor of the seller) and harmful to the buyer.

While in a down market, if the buyer walks, the seller could end up with an asset worth substantially less than when it was originally contracted in the option.

Careful consideration before entering into this type of contract is advised and the professional guidance of a real estate attorney highly recommended.

For more information see Rent to Own Pro-Con

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