What is Rent to Own?

Rent to Own is the lease of a home with the option to own it at the end of the lease period. Rent to own, lease purchase, lease option and lease option to purchase are used interchangeably.

There are five (5) components to the Lease Option to Purchase Agreement:

  1. Sales Price: This is agreed upon up front by the Buyer and Seller.
  2. Option Money: Similar to a down payment, this is the money the Buyer pays the Seller for the right to purchase the property at an agreed upon time in the future. This money is applied towards the future down payment of the property. It is not refundable if the Buyer does not exercise the option.
  3. Monthly Rent: The current market rent.
  4. Rent Premium: This is added to the Monthly Rent. The Buyer pays this amount to the Seller in addition to the Monthly Rent and it is applied towards the future down payment of the property. All Rent Premiums are not refundable if the Buyer does not exercise the option.
  5. Option Period: The maximum length of time the Buyer has to exercise his/her option to purchase the property from the Seller. Nobody else can buy the property during the Option Period. However, the Buyer can sell the option to somebody else. If the Buyer does not exercise the option and purchase the property at the end of the option, the option expires. The Buyer is not obligated to buy the property.

Example

  1. Agreed upon sales price: $200,000
  2. Option Money: $6000 (3%)
  3. Market rent: $1200
  4. Rent premium: $300 (x 12 months = $3,600)
  5. Option Period: 1 year

In this example, at the end of one (1) year, the Buyer would have $9,600 to use as a down payment to purchase the property. If the Buyer decides not to purchase the property at the end of the Option Period, the $9,600 is forfeited.

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