Rent-to-own is a real estate term relating to a real estate agreement which is composed of a rental lease and a purchase agreement where the tenant has the option to purchase the property at a fixed price at a specified point of time in the future. It is also known as lease to purchase option, lease option, a type of owner financing or lease-to-own. The lease resembles that of a typical rental lease where the land owner, the lessor, allows the other party, the lessee, to occupy the property in return for a monthly payment. The option to purchase the property usually states the price at which the property is to be bought and the time period during which the tenant is able to exercise the option.
Rent to own contracts typically become more popular during housing market downturns as property sellers may need to vacate the property before it can be sold, and landlords may use them as a way to find good tenants. A homeseller may attract the tenant by having a specified portion of the rent applied as a credit toward a down payment on the house, or may receive a bulk sum of money for the option giving the tenant time to rebuild their credit if necessary.
The concept of rent to own is not new, but with the credit markets and housing crash, these contracts are becoming much more popular. If you are a buyer/tenant interest is a rent to own or lease purchase agreement, we are going to outline costs involved in a rent to own transaction, how to prepare yourself and where to look for these types of homes.
Costs associated with a Rent to Own (Lease Purchase)
- 1 1/2 Month Security
- One Months Rent
- Realty Fee, which tends to be one month’s rent or 10% of the Gross Annual Rent (Tenants typically pay the realty fee, although some homeowners can and do split or pay for the realty fee).
- Home Inspection ($350-$450).
- Attorney Review ($750-$1500).
- On the MLS. Real estate agents like me and/or other Realtors have access to the MLS, where rental property listings will specify if they are offering a rent to own or lease purchase option. If you are looking in the North Jersey Region (Union, Essex, Morris, Passaic, Somerset, some parts of Hudson, Middlesex County, you will want to speak with an agent that has access to Garden State MLS like me). Middlesex County has their own MLS as well.
- Craigslist (North, Central and South Jersey). Use the keyword phrase Rent to Own.
- Rental Listings with specific remarks on rent to own or lease options
Gather the Following Documents
- 2 of Your Most Recent Paystubs
- W-2s or Tax Returns
- Credit Report (you can get a free copy of your credit report here).
- Explaination of Your Why Your Credit History is Not Favorable.
- References (Personal or Business).
Pros and Cons for Both Buyers/Tenants
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