How to Create Rent-to-Own Home Agreements

When a potential buyer and landlord enter into a rent-to-own home agreement, they both have very specific motivations. The landlord is interested in unloading the property at some point in the future with a guarantee of regular payment in the meanwhile, and the buyer is looking for a creative way to buy a house when he is plagued with bad credit problems. Down the line, when a mortgage lender sees that the renter made regular on-time home payments every month for 2 or 3 years straight, the lender is more likely to approve the potential buyer for a loan. Each of the two parties can achieve their ultimate goals as long as the rent-to-own agreement is drawn up correctly.

Step 1

Decide on a selling price for the house when the rental period will be over. Determine the amount that will be paid each month for rent based on similar rents in the area.

Step 2

Determine the length of the rental period. Many rent-to-own contracts allot 2 to 3 years for rent payments before the buyer is required to submit paperwork to a mortgage company to try to get approved for a home loan. The arrangement can always be extended if necessary, as long as both parties agree to sign an updated contract.

Step 3

Agree on a deposit for the property. The landlord needs some type of assurance that the potential buyer is serious about the arrangement. He also needs a cushion in case the buyer-to-be defaults on the agreement. Make it clear in your rent-to-own agreement that this deposit will be nonrefundable. The amount that the buyer will finance (when the time comes) will most likely be the agreed-upon sales price minus the rent payments and deposit.

Step 4

Clearly state what will happen if either party defaults on the agreement. For example, if the potential buyer misses rent payments, the contract is null and void, he will lose the deposit, and the house will not be sold as originally agreed.

Step 5

Write all terms down on paper. Both parties need to sign the lease agreement in the presence of a notary.

Tip

If you are a landlord, it makes good business sense to have a lawyer look over the terms of the agreement to be sure that you haven't missed any important details. In addition to on-time rent payments, the buyer also needs to maintain a good payment history on other accounts (such as credit cards) in order to be seriously considered for mortgage financing. If you are the renter, make sure that the rent-to-own agreement is giving you a fair shot at actually buying the house at some point in time.

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