Rent With Option to Buy How it Works

Rent with an option to buy can be a creative way to help sell a home

Renting with an option to buy consists of a standard lease with a purchase option added in the lease or a separate agreement. Including an option to purchase in a residential lease can benefit the landlord and the tenant. Tenants can secure the rights to a house they like and get extra time to save for a down payment. Landlords can increase their odds of selling a house in a tough market and may be able to charge a higher rent.

Option Duration

An option agreement needs to specify an expiration date by which the tenant must either purchase the property or lose the option. No property owner would want to burden his rental home with a purchase option that never expires or that continues beyond the lease term. Not defining an expiration date would also violate an arcane legal doctrine called the rule of perpetuities.

Purchase Price

The Landlord and tenant must agree on a purchase price the tenant will pay to exercise the purchase option. The price will usually be higher than what the landlord could get by selling the home immediately. An agreement to determine the price later by appraisal could replace a fixed number stated in the option contract. However, the appraisal method creates more opportunities for disputes and delays when the tenant exercises the option.

Credit for Rent Payments

In some rent-with-an-option-to-buy deals, the landlord will credit a portion of rent payments toward the purchase price. This allows the tenant to build something similar to equity before closing.

Exercise Procedure

Any option should include clear instructions and time frames for exercising the right to purchase. The tenant/buyer will need to give some sort of written notice stating his intention to purchase the property. Closing of the purchase must occur within a specified number of days after the exercise notice. Unless the option agreement includes detailed provisions regarding the purchase transaction (like inspections, title insurance and warranties), the parties will want to agree on a form of purchase agreement in advance that will govern the purchase.

References

• The New York Times: Rent Now, Buy Later