What Does a Real Estate Lease With an Option to Buy Mean?
A real estate lease with an option to buy, also known as a rent-to-own contract, is an alternative path to home ownership. Like any real estate transaction, a lease with an option to buy is a serious financial decision that can have long-lasting consequences for the owner and the renter.
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Features
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In a rent-to-own property situation, a renter/prospective buyer leases land from a property owner with the ultimate option or expectation of purchasing the property. The rent-to-own contract specifies the costs and conditions of the arrangement and there is an option fee that paves the way for the renter to become a buyer. Typically, a portion of the rent paid during the lease agreement goes toward the purchase price of property or future closing costs, which is agreed upon in writing by the two parties. The renter and the owner sign the contract--a legally binding agreement. The conditions set forth in it must align with all applicable legislation.
Time Frame
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According to real estate advice site Trulia, the typical rent-to-own property lease has a rental portion that lasts one to two years. During that time the renter is expected to pay the agreed-upon rent and any other obligations referenced in the signed contract.
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Benefits
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For a renter with less than perfect credit, a real estate lease with an option to buy may be an appealing path to home ownership. Traditional home ownership involves obtaining a mortgage loan from a bank that will take credit score and other factors into consideration when determining whether or not to approve a loan and/or to determine the interest rate of the loan. A rent-to-own contract is more flexible and the rental period allows a renter/prospective buyer to work on repairing credit in order to qualify for a traditional home loan and exercise the purchase option when she is in a better financial position. In a tight real estate market, the property owner benefits by having a property that generates income instead of potentially sitting empty.
Separate Lease
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Rent to Own The Right Way, a real estate advice resource, urges renters to sign a lease that is completely separate from the option-to-purchase agreement. This is to protect the renter so that a lease dispute does not automatically nullify the purchase option and thus waste the option fee.
Warning
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Financial advice site Financial Web warns those interested in rent-to-own property to pay close attention to where the monthly rent is applied. If a portion is going toward closing costs, the money should go into an escrow account for immediate access at the appropriate time. Additionally, foreclosure, divorce or other legal proceedings could impact a renter's ability to recover the option fee or exercise the purchase option.
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References
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- Photo Credit keys for new home image by Vasyl Dudenko from Fotolia.com
