What is a Rent to Own Agreement?


Rent-to-Own agreements are utilized for a variety of reasons – the most common of which is the situation where the buyer is not able to qualify for a mortgage at that particular time but feels confident that given some time, they will be able to do so.

A Rent-to-Own agreement is essentially 2 agreements: a lease agreement and option to purchase agreement. They can be written as two separate documents or included together in one, but the important thing to remember is that there are two separate transactions taking place.

The Lease

This can be a standard residential real estate lease. There is nothing particularly special about it. It should be for the length of the term of the option – usually 1-3 years. Rent should be at fair market. The landlord should consider obtaining a security deposit from the tenant. The one difference in these leases from non-rent to own leases is that the landlord will often try to shift the maintenance obligations to the tenant.

Option to Purchase

The option to purchase gives the purchaser the right to purchase the property within an agreed to time frame, being the length of the lease, usually 1-3 years.

There will be a lease option fee, usually approximately 1% of the purchase price. This fee is normally non-refundable but is usually credited to the purchaser on closing.

The option to purchase should contain a fixed purchase price and potential buyers should avoid agreements that tie the purchase price to an appraisal or to a price “to be agreed upon”.

There is usually a rent credit. The option agreement will specify the price but set out that the purchase will receive a credit (usually x% of rent paid) to be applied to the purchase price.

Finally, the purchaser shall have the right to, and is strongly advised to, register their interest on title to the lands.

While the content of this post should be considered reliable and informative, this should not be considered legal advice and we recommend that you contact our firm directly should you have any questions.

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