Victoria Araj
2-3 minutes
There are two major types of rent-to-own agreements: lease-option and lease-purchase.
Both choices are similar since they both allow you to lease a home for 1 – 3 years and then buy it at the end of the term. However, there are some contractual differences between the two that you should know.
Lease-Option Agreement
Lease-option agreements require you to pay the homeowner an option fee when you sign, which can typically cost around 2 – 7% of the total purchase price.
The rent money (or rent credits) you save over the course of your lease go toward your down payment (if you buy the home). You can work with the seller to agree on a fair purchase price after your lease expires. This process usually involves an appraisal to determine how much the home is worth. In most cases, your option fee reduces the purchase price of the property.
You can walk away from the option and allow it to expire if you choose not to buy the property. However, doing so will forfeit both your option fee and your rent credits.
Lease-Purchase Agreement
A lease-purchase agreement works in almost the same way as a lease-option agreement. You still lease the home for a few years and put a certain percentage of your rent toward a down payment to buy the home.
However, when you enter a lease-purchase agreement, you have an obligation to buy the home at the end of the lease.
You and the seller agree to a purchase price when you sign the lease. You and the owner might agree to a price before you enter the contract, or you can specify a date for an appraisal and agree on a price then. Once you and the homeowner come to an agreement, you start your lease.
Setting a price beforehand gives you a better idea of how much money you’ll need in a loan. Choosing a lease-purchase agreement means you should start shopping for a loan while you’re living in the home or as soon as you agree on a price.
You’ll give up your claim to the home and all your rent credit you’ve accumulated if you cannot get funding for your home by the end of the lease. The homeowner can also sue you for breach of contract if you don’t buy the home.