Lease Agreement Template" width="325" height="420" />Use our rent-to-own lease agreement to lease your property to a tenant who may purchase it in the future.
Lease Agreement Template" width="325" height="420" />
Updated August 20, 2024
Written by Sara Hostelley | Reviewed by Susan Chai, Esq.
A rent-to-own lease agreement is a written document between the landlord or potential seller who owns the rental property and the tenant or potential buyer leasing the property. This agreement helps the owner collect rent and gives the tenant a place to stay while they consider buying the property.
A rent-to-own lease agreement details the arrangement between the landlord and tenant to lease the rental property while also granting the tenant the option to purchase the property before the end of the lease term.
Since a rent-to-own contract combines elements of a typical lease agreement and a standard real estate purchase agreement, you must include many details to clarify the arrangement’s scope.
Explore the two main types of rent-to-own contracts:
A lease-option agreement gives the tenant the right to purchase the property at the end of the lease, but the tenant can decide not to buy. Because the tenant is not obligated to buy the property, the agreement is more flexible for tenants. At the end of the lease term, if the tenant decides not to buy the property, they can stop paying rent and walk away.
For example, consider Susan, a tenant who enters a lease-option agreement with a landlord for a two-bedroom condo. With one month remaining on her year-long lease, she receives a job offer in a different state. She decides to take it, so she finishes her current lease and relocates to the new state without executing her purchase option.
The tenant’s option to purchase often comes at a price. Tenants wanting to take advantage of an option to purchase may need to pay the landlord “option money” or “option consideration.”
The parties usually set this consideration amount upfront. The amount is typically 1% to 5% of the purchase price or a portion of the monthly rent payments noted in the lease agreement part of the rental contract.
In a lease-purchase agreement, the tenant must buy the rental property unless there is a breach of contract or they can’t secure a mortgage due to insufficient down payment, credit, or other criteria.
Unlike the lease option, where the tenant can decide not to buy, the tenant in a lease-purchase agreement doesn’t have the choice. In a lease-purchase agreement, the landlord and the tenant are bound to sell and buy, respectively.
For example, consider John, a tenant who enters into a lease-purchase agreement with his landlord for a three-bedroom home. He locks in a purchase price and uses the year-long lease period to improve his credit and build equity in the property. At the end of the lease term, he follows through with his commitment to purchase the home.
The rent-to-own process can benefit the involved parties in specific circumstances. Discover the pros and cons of rent-to-own for the buyer and seller so you can understand the advantages and drawbacks from different perspectives:
Be sure to include all these details when drafting your agreement:
The rent-to-own agreement form combines a lease agreement and a real estate purchase agreement. The process is more complicated than a standard lease agreement and carries consequences if an error occurs. Here’s how it works:
Assess the property’s condition and market value to know its price range. Start with tools like Zillow, realtor.com, Redfin, US News, ForSalebyOwner, and Chase. Complete renovations and perform repairs as necessary to improve the property’s appeal to potential buyers.
While you can complete the process independently, you may hire a professional stager or real estate agent to help present the property.
Show the property to interested buyers. Depending on how much interest you can generate through advertising, you may schedule private viewings or hold open houses. Emphasize the property’s unique features and benefits and explain the benefits of the rent-to-own arrangement.
Verify a potential tenant’s income to ensure they can afford the rent and be reliable tenants through:
You can also ask interested parties to fill out a rental application. Obtain their permission to conduct a background and credit check.
Negotiate when and how you will arrive at a purchase price. Parties to rent-to-own agreements may agree to decide on the purchase price at the end of the lease if the buyer wants to exercise their right to purchase.
You can also decide on the purchase price at the outset of the lease, which most buyers prefer because it allows them to lock in a lower price in a rising property market and plan for their down payment.
Be sure to negotiate other terms, including the conditions each party needs to meet, maintenance requirements, rent premium, lease duration, and option fee. You may also decide whether to apply a portion of the tenant’s rent payments to the purchase price.
Standard rent-to-own lease agreements usually consist of two parts: a lease agreement (rental agreement) and an option to purchase. You can either sign the single rent-to-own agreement or sign it as two separate legal documents.
The lease portion in a rent-to-own agreement is like a standard lease agreement between you and your tenant. This rental agreement will have standard lease terms, such as lease duration, rent amount, and rent due date.
The option-to-purchase portion creates the rent-to-own agreement. It gives the tenant the right or option to buy the rental property within an agreed period. The tenant, in turn, pays an option fee and usually a higher rent than the market rate.
Initiate the lease period, ensuring the tenant meets their payment obligations. Follow the maintenance protocols that you outlined in the agreement. If you agree to do some basic upkeep, fulfill your obligations. Remind the tenant of their responsibility to keep the property in good condition.
Wait for the end of the lease term to approach. Be ready for the tenant to issue a notice that they want to exercise their option to purchase the property.
Facilitate the sale when they’re ready. You may need to coordinate with title companies, legal professionals, and other parties in the closing process. This way, ownership will transfer smoothly.
Maintain open communication during and after the lease period to address concerns or answer questions.
Inform the tenant if you must make a lease addendum or amendment. Facilitate negotiations to ensure the new additions benefit all parties.
View our rent-to-own lease agreement template. Download it as a PDF or Word file:
