How to Rent to Own in California
A California rent-to-own agreement is used by renters to purchase a home by establishing a purchase price based on current market values and then allocating a portion of the monthly rent payments towards a down payment. These agreements are particularly helpful to renters who may not have a sufficient down payment or good enough credit at the present time, but would still like to purchase a home in the future.
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Instructions
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Option Price and Term
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1
Determine the option price of the home you are renting by contacting a local real estate agent or appraiser and asking for a written estimate of fair market value. He will look at recently closed sales in your area and compare them to the property you are renting.
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2
Contact the landlords/sellers to see if they will agree to sell the property at a future date at this price. Sometimes sellers will want to add in a provision for inflation. For example, if today's value is $100,000 they may stipulate that the purchase price at the end of three years is $106,000.
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3
Determine the length of the rent-to-own period. This is negotiable by both parties but is commonly three to five years. It is referred to as the option period.
Rent Proration and Closing Terms
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4
Determine the percent of monthly rent that will be credited by the landlord/seller to you each month for the down payment at the end of the option term. For example, if the credit is 20 percent and the monthly rent is $1,000, then the monthly credit would be $200 ($1,000 times 20 percent). At the end of three years, this total would be $7,200 (36 months times $200).
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5
Determine the escrow period of the purchase if you decide to purchase the property at the end of the option period. Most escrows take between 30 and 90 days to close. For example, at the end of the option period, if you decide to buy the property, you will stipulate that you'll require a 90-day escrow to close the transaction.
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6
Determine the allocation of closing costs at the end of escrow. The following are examples of the closing costs paid by each party:
Owners Title Policy is paid by the seller
Lenders Title Policy is paid by the buyer
Escrow fees are paid 50-50 by the buyer and seller
Documentary transfer taxes by the seller
Third party property inspection is paid by the buyer
Loan fees are paid by the buyer
Homeowners Association transfer fees are paid by the seller
Home warranty is paid by the seller
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7
Sign the contract using the current date. In a rent-to-own contract, it is customary for two originals to be signed by each party so that each party has an original.
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Tips & Warnings
Since a rent-to-own agreement is a legally binding contract, it is important to have it reviewed by an attorney prior to signing. It's also important to put as many specific details up front in the contract to avoid confusion or misunderstanding.
In a rent-to-own contract, if buyers don't go through with the purchase, they won't be entitled to a refund of the prorated rent they paid. Sellers should be aware that they are legally bound to sell the home to a renter if the renter elects to buy the property within the agreed-upon term.
