If you’re interested in buying a condo, but can’t afford to make a hefty down payment or qualify for a mortgage, this doesn’t mean you have to give up your dream of owning your own condo or home. Another option is a rent-to-own agreement, which allows you to gradually purchase a home while living in it. Also, known as lease-to-purchase agreements, this kind of agreement can be structured in various ways that enables the tenant to buy their condo or home at some point in the lease period with all or some of the paid rent applied toward the purchase price.

What does “Rent to Own” Mean?

“Rent to Own” means almost exactly this: for some period of time you are renting your home. However, at a certain pre-specified time in your rental lease, your rent payments may be used towards the purchase price of your condo or home.

How does Rent to Own Work?

A rent-to-own agreement usually consists of a standard lease agreement in which a portion of your monthly rent is allocated toward the purchase price of the property. Typically, the lease agreement sets forth certain terms, such as the period of time that you must pay rent for the property before purchasing it, with the most common time period being one year.

Depending on the specific terms set forth in the rental agreement or lease, you might have the right to buy the property once the lease term expires, called a “lease option” (see below), or  you may be obligated to purchase it at the end of the agreed-upon time period, called a “lease purchase.” Depending on what terms you and the owner agree to, your terms may be more flexible.

How to find Rent to Own Homes and Condos?

While these opportunities do not appear every day, you may find rent-to-own home and condo opportunities through certain realtors and agents that represent individual condo owners who may be willing to sell their property in this way. Developers are also offering similar options in some new condo buildings, like Miami’s Dezer Development Group, which has developed many luxury condo buildings, including the new Residences by Armani/Casa in Sunny Isles, where Dezer is offering such rent-to-own options.

Who is a Rent to Own Contract Good for?

A rent-to-own agreement may be an ideal option for potential condo buyers who want to settle down in a new home, but need time to improve their credit scores. A rent to own contract is also good for those who want to gradually earn credit and save up for a down payment before applying for a home mortgage. Rent to own agreements are also great for first-time buyers and foreign buyers, who may not have had the time in the U.S. to build their credit. 

Either way, your chances of success at landing a favorable contract will definitely be higher if you engage the services of an experienced real estate agent who can negotiate the terms of the lease agreement for you, as well as a qualified real estate attorney to help you sort through the language of the rent-to-own agreement.

How can a Rent to Own Contract be Done?

If you’re interested in purchasing a property through a rent-to-own agreement, the first thing to do is make sure you have your team together. As mentioned, connecting with a good real estate agent and attorney will help you define what terms are best for your situation. Then you can navigate through the legal terms of the contract agreement, as these agreements may vary widely in terms of stating the buyer’s rights and responsibilities.

There are typically two types of contracts that may be drawn up in a rent-to-own agreement, and they differ in one very important aspect -- one allows you an option to buy while the other obligates you to buy the property. Make sure you are clear from the start about the type of legal contract that you are entering into. Here are the typical ways you can go from renting your condo-apartment or home to owning it:

• Lease-Option Contract: A lease-option contract grants the buyer the right to purchase the property, but does not set forth a legal obligation to do so. In these cases, if you decide not to purchase the property at the end of the lease term, you’ll be free to back out of the purchase option, with no obligation to continue renting or to purchase the property. You might, however, have to forfeit some or all of the money you’ve invested in the property, such as portions of rental payments that have been applied toward purchase, the option fee you paid up front at the start of the agreement, and any money you may have invested in repairs or maintenance to the property.
  
• Lease-Purchase Contract: A lease-purchase contract, on the other hand, protects the seller by establishing a legal obligation on the part of the buyer to purchase the property at the end of the lease term. This type of agreement often is less favorable to renters who are looking to buy, unless your contract has a pre-decided purchase price for the property. Lease-purchase agreements are less favorable in more volatile real estate market conditions.
  
  

When is it better to do a lease option versus a lease purchase when drafting a rent to own contract?

When negotiating your rent-to-own contract, there are a few factors to consider that affect whether to choose a lease-option agreement or a lease-purchase agreement.

In general, a lease-option agreement is preferred for the buyer because if offers more flexibility, since you are paying a small fee for the option to buy and can choose to exercise the option or not. If you don't exercise the option, you may lose your option fee but you are not contractually obligated to complete the purchase. 

A lease-purchase agreement is often preferred for the seller, because it obligates the buyer to move forward with the purchase.

Do Rent to Own Contracts have Fees? What are Option Fees?

In a rent-to-own agreement, the buyer must typically pay the seller a nonrefundable fee, known as the option fee or option consideration, which secures the option to purchase the property at a predetermined future date. This fee is normally nonrefundable and must be paid before you move into the property and before the lease agreement goes into effect.

While there is no market standard for rent-to-own option fees, most sellers will ask for an amount somewhere between 2.5% and 7% of the purchase price. The good news is that, in many cases, all or some portion of this option fee may be applied toward the eventual purchase of the property at the end of the lease term.

How is the Purchase Price Determined in a Rent to Own Agreement?

When negotiating a rent to own agreement, one of the most important factors for both the buyer and seller is the purchase price. However, how can you determine the purchase price of a property for a future date? Your rent to own contract should specify when and how the final purchase price of the property will be determined.

In some cases, the purchase price may be established up front, at the time that the contract is drawn up. Typically, the price may be set in advance at a slighter higher price than current market value. In other cases, the purchase price may not be established until the end of the lease term, and will be set based upon the actual market value at that time. As a buyer, it may be to your advantage to “lock in” the purchase price in advance, particularly in markets where home prices are steadily rising.

During the period of the lease agreement, the buyer will pay a stipulated amount of rent to the seller, which may be calculated at a slightly higher rate than the going rate for the market, with a portion of each monthly payment being applied toward the eventual purchase price of the property. In this way, the buyer can build up credit toward the purchase of the property, using the earned credit as a down payment toward the purchase.

When is it not a Good Idea to do a Rent to Own Contract?

If you are dead set on buying the home or condo you are renting, then this type of agreement can really work in your favor. However, there are some times when you may want to wait to enter into a rent to own contract. Typically, in down markets or when there are signs of an early recession, it’s not the best idea to enter into a rent to own contract. Why is this? Because it will be hard for both the buyer and seller to predict what the fair market price for the condo will be.

Depending on how you structure your contract, you may be able to mitigate some of this risk, however, if you are finding you are in a down market and you still want to find a way to rent to own, opt for the lease-option contract so that if you decide to change your mind, or the market continues to take a turn for the worse, you are not obligated to purchase the property.

Pros and Cons of Rent to Own Contracts

With all real estate agreements, there are advantages and disadvantages. For rent-to-own contracts, some of the advantages of renting to own include:

• You get to live in the unit before buying it, an opportunity many buyers don’t have
• You get to live in the neighborhood before buying it 
• You have a sense of how the building functions, what your neighbors are like, or find out if your unit is very noisy
• You are able to make payments towards your future purchase price without getting a mortgage right away
• You may be able to lock in a fair purchase price that you can plan for

Some of the disadvantages of entering into a rent-to-own contract include: 

• It can be hard for both parties to agree to a price
• Depending on your contract type, you may be obligated to purchase a unit that, at the time of purchase, may have lost value or you end up paying too much for
  
  

What are the Risks of a Rent to Own Contract?

As mentioned briefly above, some rent to own agreements run the risk of paying too much money in a lease-to-purchase agreement if you have not assessed a fair market value of the property at the time that the lease will end.

In our experience as realtors, one bit of advice we like to give clients is that it’s worth considering adding an exit clause to your agreement or a first right of refusal. What is a first of refusal? A first right of refusal means that at the end of your lease term, you have the first right to either purchase or decline to purchase the property before anyone else or before it goes to market. This gives you the opportunity to assess the market value at the time you are actually purchasing the property.

Who is Responsible for Repairs and other Costs in a Rent to Own Contract?

In a standard lease agreement, the owner is typically responsible for major repairs and maintenance over $100. In some rent to own agreements, you may be responsible for certain repairs and maintenance after a certain period of time, or once you enter into your lease purchase contract. Most commonly, the buyer must cover normal maintenance and repairs made to the property during the lease term, while the seller will normally retain the responsibility to pay for condo association fees, taxes, and insurance.

The contract should clearly stipulate what types of maintenance and repairs the buyer will be responsible for, since there may be repairs that should remain the seller’s responsibility, such as pre-existing damages to the property. Having the home inspected professionally before you sign the agreement will help you avoid any problems that may arise over this.

How Can I Search for a Rent to Own Listing?

While finding rent to own opportunities may seem hard, many realtors will know of opportunities. Additionally, there are search filters within the Multiple Listing Service (MLS) your real estate agent can set for you. We have years of experience in helping clients buy Miami condos that are more complex purchases, such as condo hotel investments, or units in pre construction. 
If you’re looking in the Miami area, send us an email and we will send you a list of rent to own opportunities. 

If you’d like more information on rent-to-own options or opportunities in Miami, call or email us today at (786) 930 4220.