Benefits and Pitfalls of “Rent to Own”
Leasing to own or more commonly known as “rent to own” is in essence the “layaway” of real estate. However, unlike setting aside consumer goods, renting real estate to eventually own presents a number of practical and legal challenges not found with consumer goods.
In the rent to own situation, the buyer and seller typically enter into a purchase and sale contract that stipulates the buyer shall be entitled to pre-closing occupancy of the home. One major difference between the rent to own contract and your standard purchase and sale contract is that the seller will likely require a much larger good faith deposit from the buyer. The reason for a larger deposit is that the seller is being asked to bear greater risk than in the normal context because of the longer duration between the execution of the contract and the closing.
In addition to a purchase and sale agreement between the parties, the buyer and seller typically enter into a lease agreement. The creation of the landlord-tenant relationship between buyer and seller is the second major difference between the rent to own contract and the standard purchase and sale contract. It is this difference that creates the greatest practical and legal challenges.
From a practical perspective, the buyer essentially gets to take a long term “test drive” of the home that they are supposed to purchase. The buyer may discover after living in the home for a time that they really don’t care for the home or there are particular issues that they just rather not address as the eventual owners. Unlike most buyers that may suffer slight buyer remorse, a buyer that rents prior to owning can suffer from tremendous buyer remorse. If this happens then it is likely that both the landlord-tenant relationship will deteriorate and so to will the buyer-seller relationship between the parties.
From a legal perspective, the rent to own situation can lead to unusual situations not found in your normal purchase and sale. For instance, if the buyer and seller in a non-rent to own situation disagree, the two parties can simply part ways. In the rent to own, this is not possible. If a dispute arises in the rent to own situation, given the legal protections of tenants under most state laws, then the seller will need to begin an eviction to terminate their relationship.
While there are negative implications in the rent to own scenario, there are of course benefits. This type of situation is particularly beneficial where the seller has already moved because they get a party to occupy the property and cover the carrying costs while knowing that in most circumstances they will eventually be selling the property to their tenant.
If you’re still curious about rent-to-own, or have any other questions for Flat Fee or Rob Foley, contact us here.