In a rent-to-own (commonly called a lease-option) there are two separate agreements that you are going to enter. One is the lease. The second is the 'option to purchase' or 'option to buy'.
Generally, people who want to rent to own have poor credit, or unverifiable income. They are often self employed. Lease-options are also used by real estate investors, as there are new caps on the number of conventional mortgages an investor may have at any given time.
The lease, is generally a typical lease, which will spell out the responsibilities and rights of both parties. Typically, the lease conditions will reference the 'option' and all conditions of the lease must be adhered to for the 'option' to be exercised. The lease will generally have the right to renew the lease a certain number of times (a lease in CA can only be for one year, so generally people need more than one year to fix their credit and get a down payment)
Often, there is no 'security deposit' for the lease. You only have the monthly payment. As the intention is to transfer the property to the lessee (renter), most agreements require the lessee to take care of all repairs and maintenance, though many lessors will guarantee the property for a period of three to six months. The upside is that you're also allowed to paint and decorate the house in any manner you see fit. In fact, most agreements allow you to do anything that improves the property.
The 'option' is generally purchased from the lessor. This amount will typically be greater than the amount of a security deposit, but less than the cost of a typical down payment and closing costs on a purchase, but will also may be influenced by your credit history--typically $5000-25000. The 'option' money is usually credited to the purchase price once you buy the property. If you fail to abide by the lease agreement, you are not entitled to any of this money back.
Typically, a certain portion of the monthly rent will be credited to your down payment. This is completely negotiable by both parties.
Depending on who you are dealing with, you might be able to trade something valuable instead of cash. Examples include, but are not limited to: vehicles, jewelry, collectibles, or tools. It's entirely between the parties. The parties would have to agree to the monetary value of the items to be credited to the down payment.
Once your credit has improved to the point where you can obtain financing, and you have acquired the necessary down payment (through saving or accumulating the necessary credit through your 'option money' and your monthly payment) you can exercise your option. You and the seller enter into escrow and after completing escrow, you own the home.
That's generally how it works. Specifics vary from agreement to agreement. You should only enter into an agreement which you are certain you can complete in the time allotted by your lease and the number of renewals, though some sellers will allow you to re-up your agreement with additional payments.
9 months ago