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Rent-to-Own Agreement Template

A rent-to-own agreement is a lease agreement that gives the option for a tenant to buy the property during the rental period. The terms for purchase are often negotiated at the time of lease signing (e.g., sales price, closing date, rent credits, etc.)
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Rent-to-Own Process (10 steps)

Two (2) Types

  1. Option to Purchase – The tenant has the option to buy the property at any time during the lease period.
  2. Lease-Purchase – The tenant is obligated to buy the property within a specified period (or will commonly lose a deposit amount).

1. Negotiate the Rental Arrangement

landlord and tenant negotiating terms of rental agreement

Like any residential lease, it’s required that the parties come together and decide the following:

Lease Topics

2. Decide the Option to Purchase

landlord and tenant negotiating terms of rental agreement

After the rental portion of the agreement has been agreed upon the parties may come together to decide the terms of the tenant’s option to purchase the property.

Purchase Topics

  • Purchase Price ($)
  • Downpayment
  • Rent Credits
  • Term of Option
  • Option Fee (if any)

3. Attach Required Disclosures

landlord and tenant in discussion inside home

Attach the required disclosure forms for the state where the property is located. This often includes a disclosure form listing the current condition of the property and any defects or repairs known by the seller.

Common Disclosure Forms

  • Lead-Based Paint Disclosure: Required to be attached to the agreement if the property was constructed before 1978.
  • Property Disclosure Statement: Lists the property’s current condition, including its utilities.
  • Homeowners Association (HOA) Disclosure: If the property is part of an HOA, all the regulations must be transferred to the buyer.
  • Megan’s Law Disclosure: To inform the buyer of where they can find sex offenders in the immediate area.
  • Radon Gas Disclosure: If required, the last testing results for radon gas on the property should be listed.

4. Check the Tenant’s Credit

landlord's tablet showing cozy.com homepage to screen tenant

Like any other lease agreement, the landlord is recommended to give the tenant a rental application in order to obtain their personal information to perform credit, background, and consumer checks.

Consumer Report Provider

Sex Offender Search

U.S. National Directory – To perform a nationwide check of an individual or geographical area.

5. Verify the Tenant’s Income

landlord verifying the tenant's income using laptop

In 2023, the rent-to-income ratio was 31%.[2] Therefore, it is recommended that a landlord verify a tenant’s income to ensure they can afford the monthly rent.

Ways to Verify Income

  • Bank Statement – Last 2-3 months
  • Employment Verification
  • Pay Stub – Past 2 weeks.
  • Tax Return – Past 2 years

6. Signing the Document

tenant signing option to purchase rental agreement as landlord hands over keys

At the lease signing, the following is required by each of the properties:

Landlord’s Obligations

  • Access to property (e.g., keys, fobs, etc.)

Tenant’s Obligations

  • Security deposit (if any)
  • First month’s rent (must be paid before move-in)
  • Other fees (e.g., parking, pet fees, etc.)

7. Tenant Moves In

tenant carrying stack of boxes into new home

The tenant can move into the property. The tenant pays rent and continues their obligations under the lease until ready to purchase.

Rent Credits: A portion of the rent that is set aside and applied towards the purchase price if the tenant buys the property. If the tenant doesn’t buy, the rent credits are forfeited.

8. Giving Notice

tenant handing envelope with earnest money deposit to landlord

When the tenant is ready to buy, they must notify the seller. This notice should be sent by certified mail with a return receipt to provide evidence that the landlord received it.

9. Enter into a Purchase Agreement

landlord and tenant reviewing purchase agreement

The parties should convert their agreement into a purchase and sale agreement and other negotiable items.

Negotiated Items

  • Appliances & Fixtures: The sale includes a list of the appliances and fixtures.
  • Closing Date: The agreed-upon deadline by which the buyer must complete the property purchase.
  • Financing Contingency: The conditions under which the buyer has to obtain financing.
  • Inspection Period: The buyer’s right to inspect the property for defects.
  • Survey: To confirm that the property lines are where the owner claims they are.
  • Title Defects: The buyer’s right to perform a title search and, if any defects appear, the timeframe to fix such issues.

10. Close on the Property

buyer submitting new deed at county registrar's office

At the closing, the buyer typically wires funds to the title company and signs all necessary documents to transfer ownership. If the seller provides financing, the parties will sign additional loan documents to complete the sale.

There are usually closing costs and transfer taxes due by the parties to complete the transaction. This will be provided to each party beforehand in a closing statement.

Recording the Deed

The sale is final and complete when recorded at the local Registry of Deeds office. It is commonly recorded within 30 days after the closing.

Seller/Owner Financing

It is common in a rent-to-own agreement for the seller to give owner financing to the buyer. In this case, the seller would hold a first (1st) mortgage, meaning if the buyer did not pay monthly amounts, the seller would have the first lien and right to repossess the property.

Cons

  • Obtain ownership of the home;
  • Write off the interest portion of the mortgage payment; and
  • Can resell the property.

Sample

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