RENT TO OWN: THE LEASE-OPTION AGREEMENT

by | Jun 16, 2016 | Articles, Real Estate Law

Do you have bad credit or lack a down payment? A lease-option (rent to own) agreement may be the answer.

How can you become a homeowner without putting down a large down payment on the home you want to purchase?  One way to go about it is to negotiate a lease-option (rent to own) agreement with your landlord.  A lease-option agreement is a lease, combined with the right for you, as a tenant, to purchase the home you have rented by a date specified in the lease. “Rent to own” is just another way to describe a lease option agreement. View a sample of a lease option agreement.

The Must-Haves to Enforce a Lease-Option Agreement:

  1. A written, executed (signed) lease;
  2. A completed Purchase and Sale Agreement attached as an exhibit to the lease;
  3. A specific procedure to exercise the option must be stated in the lease;
  4. The Purchase and Sale Agreement must have a valid legal description of the property;
  5. The Purchase and Sale Agreement must have valid consideration for the purchase price of the property.

Labor in Lieu of a Cash Down Payment

Most often, a certain portion of the monthly rental payment is applied to the down payment so long as the renter exercises the option by the deadline to do so.  If the option is not exercised by the giving of a notice to the landlord that the tenant is hereby exercising the option, the landlord generally keeps the full payments that have been paid as rent.  Another way this can be done is to have the tenant credited for labor that the tenant conducts for the landlord.  The credit is dedicated to the down-payment toward the purchase of the property.

A Purchase and Sale Agreement is Required

In order to make a lease-option (rent to own) agreement a fully binding agreement, a Purchase and Sale Agreement is created and made an exhibit to the Lease Option Agreement.  Upon the execution of the Purchase and Sale Agreement by both parties, the exercising of the option binds the parties to a purchase and sale of the premises based on the terms of the Purchase and Sale Agreement.

The Purchase and Sale Agreement must contain all of the elements of a valid contract for the purchase of real estate; such as a valid legal description of the property and the consideration being paid for the property.  The agreement must also be in writing as all transfers of real estate must be contained in a written agreement to be valid.