Key Features
- Purchase price. An addendum should stipulate whether the purchase price will be fixed or determined by an appraisal at the time of sale.
- Option fee. The addendum should include the fee amount and whether the fee will be refunded should the tenant choose not to purchase the leased property.
- Rent credits. Consider what happens to rent credits if the tenant chooses not to purchase.
- Notification method. An addendum should specify how the tenant will exercise their option to purchase, including the deadline by which to do so.
Option to Purchase vs. Lease Purchase
There are two types of rent-to-own lease addenda. The first gives a tenant the option to purchase a leased property at the end of the leasing period. The second obligates the tenant to purchase the property after a lease.
Either way, a rent-to-own lease addendum is more about bookmarking the tenant as the buyer, rather than legalizing a sale. Even after signing a rent-to-own lease addendum, a tenant can’t purchase the property without first giving the landlord a written notice of their exercise of the option to purchase and eventually signing a purchase agreement.
What Is an Option Fee?
An option fee is essentially a deposit, or a payment that the tenant uses to secure the right to purchase the property in the future. Like a deposit, an option fee is generally non-refundable. A rent-to-own lease addendum should specify whether the option fee will count toward the property’s purchase price.
What Are Rent Credits?
Some landlords will put aside a portion of a tenant’s monthly rent check as rent credits. These credits are, in essence, paying down the down payment.[1] Rent credits are not equity, meaning they don’t buy or imply ownership of any percentage of the property.
Beware of Scammers
The FTC warns that tenants considering a rent-to-own arrangement should be cautious. Scammers have charged option fees and rent credits, only to burden tenants with debt or damage at the time of purchase.[2] To avoid scams, check records to ensure the landlord is the owner, get a home inspection, and keep a paper trail.
Pros and Cons for Landlords
Pros
- Get an upfront option fee
- Avoid the time and expense of looking for a buyer
- Keep earning rent while a buyer prepares financing
- Tenant is more invested in caring for the property
Cons
- Risk of underestimating the future sale market
- Generally precludes the possibility of an urgent sale
- More complicated legally than a lease or a purchase agreement
Pros and Cons for Tenants
Pros
- More time to qualify for homeownership
- Locks in a purchase price
- Simplifies saving for a mortgage
Cons
- Risk of losing option fee
- Risk of losing rent credits
- Possibility of paying higher monthly rent