Rent-to-Own Agreement

Definition

A Rent-to-Own Agreement, also known as a lease-option or lease-purchase agreement, is a contract that allows a tenant to rent a property with the option to buy it at a predetermined price before the lease expires. The tenant typically pays an upfront option fee and may have a portion of their monthly rent applied toward the future purchase.

Explanation

Rent-to-own agreements are popular among buyers who need time to save for a down payment or improve their credit before qualifying for a mortgage. These agreements typically include:

Option Fee – A non-refundable upfront payment (usually 1%–5% of the purchase price) that secures the tenant’s right to buy the home.
Monthly Rent Credits – A portion of the rent (e.g., $200/month) is set aside to go toward the future down payment.
Purchase Price Agreement – The home price is either fixed at the time of signing or determined by an appraisal at the time of purchase.
Lease Duration – Typically 1–3 years, giving tenants time to prepare for a mortgage.
Obligation vs. Option – Some contracts require the tenant to buy (lease-purchase), while others give them the choice (lease-option).

Pros and Cons of Rent-to-Own Agreements

✅ Advantages:

Allows buyers to lock in a home price while preparing for mortgage approval.
Gives tenants a chance to build equity before officially owning the property.
Provides a test period to live in the home before committing to the purchase.

❌ Disadvantages:

The option fee is non-refundable if the tenant decides not to buy.
If home values decline, the tenant could be locked into an above-market price.
Tenants may still need lender approval when it’s time to purchase.

Example

A tenant signs a 2-year rent-to-own agreement for a home priced at $300,000. They pay a $6,000 option fee and $2,500 in monthly rent, with $300 credited toward their down payment.

At the end of two years, they can:
✅ Purchase the home, using $6,000 + $7,200 in rent credits ($300 × 24 months) toward the down payment.
❌ Walk away, losing the $6,000 option fee and rent credits.