Avoid Legal Pitfalls in Rent-To-Own Home Contracts

For many Americans, the dream is home ownership. But for some, it’s a goal out of their financial reach. It may be a poor credit score or prior foreclosure. While you may not qualify for a mortgage, you still need a place to live, and one option to consider is a rent-to-own contract.

What Is a Rent-To-Own Contract?

Rent-to-own contracts are agreements between a homeowner and a home buyer to slowly transfer the property without involving a real estate agent, mortgage company, or third-party lender. The three most common types of rent-to-own sales are leases with an option to purchase, land installment contracts, and wrap-around mortgages.

Option 1: Lease with an Option to Purchase

In this model, a lease-option agreement is signed, and the buyer often pays a large down payment or upfront fee and then makes rental payments to the property owner for a set period of time. When the lease term runs out, the buyer/renter has the option to pay the rest of the home purchase price.

If the buyer cannot pay the whole amount for the house before time runs out, the seller keeps the option fee, keeps the house, and keeps all the payments the buyer made. The buyer gets nothing.

Option 2: Land Installment Contract

A land installment contract is an agreement to give monthly rent payments to the owner of a property until the property is paid off. This can take a really long time, and often these contracts say if you miss one payment, you will lose the house and any and all equity you have paid into it.

Option 3: Wrap-Around Mortgage

A wrap-around mortgage is an agreement in which a renter/buyer makes monthly payments to the seller, who agrees to pay their mortgage payments with this money. This agreement often makes the seller money when they charge more in rent than their mortgage payments and pocket the excess.

Legal Due Diligence on the Rental Property

There is a right way to enter into any of these rent-to-own agreements, and, unfortunately, many wrong ways to do them. In general, you will want to find out as much as possible about who you are entering into a contract with. Know who owns the property, if the property taxes are paid up, and the quality of the property through an inspection report.

If you don’t have the time or financial ability to investigate a new home opportunity, there are services to help you make the best decision possible. And remember: You may not have much money now, but over the course of a year or multiple-year rental agreement, you are likely to spend tens of thousands of dollars on this place. Make sure you’re entering into something that is worthwhile instead of losing out on the back end.

Find Experienced Legal Help

Most importantly, if you decide to enter into one of these agreements, be certain that the contract you sign is in your best interest and a smart option. Be sure to contact an experienced and reputable attorney before signing anything. For more information on this area, check out our overview of real estate laws.