Creating a rental purchase agreement is a legally binding option for anyone looking to rent the property before buying it. The lease almost always ends with a sale, typically at a price agreed upon at the beginning of the deal. There are advantages for both the tenant and the seller in this kind of agreement, and a variety of reasons they might want to create a rental purchase agreement instead of buying or selling right away. This article will explore the benefits of the contract and how to go about creating one. If you want to ensure you’re making the right deal, consider hiring a real estate lawyer to assist you with the contract.
What Is a Rental Purchase Agreement
Rental purchase agreements are rent-to-own contracts between a tenant and a landlord created for the tenant to purchase the property later. They are often called lease purchase agreements and can be especially appealing for first-time homebuyers who need time to save for a down payment or build credit scores. Rental purchase agreements are also attractive to homeowners who can’t sell their place but need the extra income a tenant would bring in. Tenants should always be aware of their rights as a renter.
Benefits of Rental Purchase Agreements
There are many benefits to lease purchase agreements. If a homeowner needs to move and their house isn’t renting, they might want to lease it for the time being. Real estate investors with multiple properties might use a rental purchase agreement to get a fair price on a new property. People struggling with getting a down payment together could also find this agreement as a great alternative to scrambling for money they don’t have. Whatever the reason, rental purchase agreements are usually beneficial to both parties.
Benefits for Buyers
Depending on the tenant’s motive, a rental purchase agreement can be a great choice with many benefits. Tenants can save on a down payment by paying rent. Rent might be higher than market value for this reason, but it can still keep the buyer from a traditional down payment. Another benefit for tenants is not having to move again. Moving can be costly and a big hassle, so not having those costs or the work is a big benefit for some people.
Another significant outcome of this agreement is that if the value increases above the agreed-upon purchase price, the tenant will already have built equity in the property. Finally, a lease purchase agreement gives buyers time to repair any credit issues they may have if they can’t qualify for a mortgage yet. If you already have a mortgage and are struggling to pay it, consider mortgage forbearance or deferment. Here are the great buyer benefits of rental purchase agreements:
- Saving on a down payment.
- The convenience of not having to move again.
- Opportunity to build equity.
- Time to repair credit score.
Benefits for Sellers
There are benefits for sellers in rental purchase agreements as well. Much like it takes the hassle of moving away from tenants, it also takes away the hassle of finding new tenants for the property. Sellers can lock in a reasonable price for their property straightaway. This kind of agreement will also attract responsible tenants since they are interested in owning the property. Sellers won’t have to worry about any damage to the property or other issues because the tenants will want to take good care of it. Finally, even if the tenant decides not to purchase the property, the up-front payment could be a good return on investment. Here are the benefits for sellers:
- Lock in a reasonable price for the property.
- Attract responsible tenants who will take care of the property.
- Avoid the hassle of looking for new tenants.
- Up-front payment can be a return on investment.
How to Structure a Rental Purchase Agreement
Now that you know what a rental purchase agreement is and the benefits, let’s talk about how they’re structured. Knowing how to structure a lease purchase agreement is crucial. If you have any doubts, consider talking with a real estate lawyer. The rental purchase agreement format is simple, with two documents typically—one for the lease agreement and the other for the end-of-lease sale. Let’s go through the two different pieces in detail.
The lease agreement is not your standard lease, since in the end, it will lead to a sale. When you’re making a rental purchase agreement, your lease will include unique stipulations. These could be special clauses such as requiring the buyer to pay for:
- Maintenance costs
- Property taxes
- Insurance fees
- Option fee
- Down payment (made through higher per month rent)
The option fee is a clause to look out for, especially if this is your first lease purchase agreement. It is a fee agreed upon by both parties that legally binds the landlord to sell the property to the tenant. The sale will occur at the end of the lease, even if the landlord changes their mind. The option fee can be any price and is usually non-refundable.
Furthermore, the lease agreement will determine what amount of each month’s rent will go toward a down payment. After the lease period ends, this money can be used as a down payment to purchase the property. The one downside of this is that if the buyer backs out of the sale, they forfeit this down payment money. So, if you’re choosing to do a lease purchase agreement, you should be sure it’s the right property for you.
After the lease period is the sale. The contract of sale created as part of a rental purchase agreement is a crucial part of the deal. It will outline the purchasing process and terms once the lease period ends. When signing the lease, both parties will have agreed upon a purchasing price (no matter how long the lease period is). Usually, the purchasing price is higher than the market value to account for appreciation. If appreciation doesn’t happen, the price will remain the same. So, it can be a gamble but often works out for the best.
For the sale contract, the buyer will have to secure a mortgage loan on the property. They can use their agreed-upon down payment timetable for leverage with the lender. At the time of sale, the lender will transfer the funds to the seller to transfer the title. It’s a great idea to have a lawyer review these contracts before signing. If the buyer can’t secure financing, the agreements typically nullify the sale contract. But in some cases, they require full repayment even if you can’t afford it.
Choosing Rental Purchase Agreements
Rental purchase agreements are an excellent choice for both buyers and sellers. They offer a well-structured path to buying property and ensure the tenants will care for the property. They can also be a helpful alternative for anyone struggling to get a mortgage or make a down payment. The two-part agreement is simple enough, with a lease period and a contract of sale. It is a legally binding agreement, so both parties should be sure it’s the best choice for their situation.