Renting to own contracts, or lease options contracts as they are also known, are agreements between the owner of a property and another party, who is interested in acquiring the respective property. For various reasons, most commonly from the lack of funds at the moment of the signing of the contract, the two parties agree to a rental period, finalized with the purchasing of the property by the tenant.
This type of transactions can be a profitable deal for both the buyer and the seller. For both of them the lease option contract is safer and cheaper than other kind of transactions.
Nevertheless, a savvy investor who is set to make profit from every deal needs to acknowledge some of the subtle aspects of a rent to own contract. When the bottom line is drawn, these special clauses are extremely important and can mean the difference between a good deal and a severe loss.
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Here are a few typical aspects that you should pay attention when signing rent to own contracts:
The length of the contract
Monthly amount paid that goes towards the purchase
How the tenant should maintain the property
Some special clauses are:
Subleasing clause – the lease with option to buy contract may include a exclusivity clause. This means for the tenant that he or she cannot sublease the house to a third party. This is not a problem for families or for those who use the house as their actual home.
For an investor though, who doesn’t plan to actually live in the respective house, keeping the property vacant is not a valid option. Therefore, be careful to specify in the contract that you have the right to sublease the property, of course after notifying the owner.
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Assigning the option to a third party – you should also consider negotiating with the owner your right to assign the buy option to a third party. Sometimes you may need to walk away from a lease to own deal, for example when the market value of the property has diminished during the lease period and you have set the buying price at the beginning of the deal.
In these cases you can assign the deal to an interested third party allowing that investor to take your place in the deal. If you play your rights it’s even possible to get a nice profit from the assignment.
The forfeiture clause – is the clause that states what will the course of action be in the situation in which the tenant/buyer fails to honor the obligations from the contract. This clause is present in almost all lease with option to buy contracts. As an investor you need to make sure that the contract is written in a clear manner and that the clauses are reasonable for you.
Because lease option home buying can require a lot of attention to the fine print from the contracts, you need to pay attention to all the clauses in the document. If possible ask for the services of a company specialized in escrow operations; this will be an extra precaution that you take in order to ensure that a lease option deal is good for you.