Ok, rent to own, sounds straight forward. You rent the house then buy it. But, what about all the details in between? What is this magical stuff that happens between the renting and the owning? What’s the “glue” that holds this whole thing together. And, hence the usual question, “How does it work?”
Well, once you understand the “rent to own” concept, it’s fairly simple, easy and straight forward. I guess it’s like driving a car, very simple for the experienced driver, yet amazingly difficult to the new driver! So, let’s get started with some basics.
What is a Rent to Own Deal?
A rent to own arrangement is made up of two documents; first, a traditional residential lease and next, a separat”option to buy” contract. Most people are familiar with a traditional residential lease and therefore are comfortable with this part of the deal. It’s just your normal lease; the one you set up when you rent any residential property virtually anywhere in the world. Can be very formal; can be informal. Can be with a real estate agency or you can do it yourself.
The “option to buy” contract is not so familiar to most people. Yet, it’s easy to understand. It’s just a legal document that spells out your agreement. What is your agreement? That’s the fun part because … it’s all negotiable! That’s what makes the rent to own setup so attractive. You can make it fit the “needs and/or wants” of the parties involved.
The basic questions answered by the option contract are as follows:
- How long is the option period?
- How much is the deposit?
- How much are the repayments? How often are they paid? When are they due? What happens if they’re late? What happens if you miss one, or two or more? How much is applied as “rent credits” and comes off the price of the home?
- Who pays for the legal costs of setting up the deal?
- Does stamp duty apply? Who pays it?
- What happens if the buyer doesn’t take up the option to buy? What happens to the deposit? What happens to the “rent credits?
The option contract essentially documents the sales part of the deal. Once you come to an agreement, write it down then send it off to the legal team to have the contract written up.
There’s a lot more to rent to own, but let’s save the details for a series of follow-on articles. It’s probably better to take on this subject in bite sized pieces.
It took me a while to understand the rent to own concept. Although I have a solid understanding of the concept, I still have questions. But, there’s always going to be questions because … each deal is different. Each deal will suit the particular people involved. But, not to worry, that’s where the legal team comes in; just have them write it into the contract. And, this is where rent to own can be a lot of fun – letting the creative juices flow as you make the deal work for all parties involved!
I put together my first rent to own over a year ago. In that time I’ve learned a lot. I’ll share with you what I’ve learned in my follow-on rent to own articles.