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What Is a Rent-to-Own Contract?
A rent-to-own contract or RTO contract is a contract agreement between two parties. It is a kind of contract that gives the one renting the property or asset the right to choose if he or she will purchase a rented property from the owner. The main idea of this is that you will first rent the property and have the option of buying it before the rental lease agreement expires.
A RTO contract can also be referred to as a lease-to-buy contract. This will usually contain 2 types of agreement. The first is the customary lease agreement and the second is the option to buy the property before the lease agreement expires.
Key Elements Included in a Rent-to-Own Contract
Step by Step Process in Creating a Rent-to-Own Contract
Step 1: Make Use of a Template or a Format
A RTO contract or lease-to-buy contract is a legally binding agreement between the landlord or the seller and the tenant or the buyer. It is a must that this is created with clarity as well as with certainty. Make use of the templates available above in order to have an outline of the different key elements that are necessary to include in this kind of contract.
Step 2: Fill Out the Necessary Details
With the templates that you will select. Fill out the necessary details that are asked in the contract. It is important to politely ask for the basic information of the client or the buyer. This is an important factor to add in the contract. It is also a must to thoroughly describe and explain the terms for the payment and the option for purchasing. Make use of a payment plan agreement in order to avoid disputes.
An important part of this step is to proofread the document. It is crucial to make sure that all the pieces of information written in the contract are accurate and true.
Step 3: Consult a Lawyer
It is important to have someone check and evaluate the terms and conditions stated in the contract. This will usually require a third party consultant or particularly a lawyer. In seeking for expert and professional advice, make use of a consulting contract to ensure that there are no discrepancies.
A consultant or a lawyer will make sure that the terms and conditions stated in the contract are true and up to the standards. It will also make sure that it is not violating any local or state law.
Step 4: Finalize and Sign the Document
As this is considered a legally binding contract, it is a must that both the landlord or the seller as well as the tenant or the buyer will sign the document. This step will prove that both parties have fully read and agreed to the terms stated in the contract. This is done in order to avoid any legal issues. This document will also be a point of reference in case there are disputes that will arise throughout the duration of the contract.
Pros and Cons of Rent to Own
In order to fully know and understand the advantages and disadvantages of this technique, it is a good idea to make use of a pros and cons list.
For the Side of the Buyer:
As the buyer is renting the property, he or she builds equity. The amount of payment used can build up a large sum of money that later can be used to purchase the property.
No bad credit:
Those who are not capable of getting a loan may opt to have a rent-to-own contract. This is a good way to actually obtain credit scores that later may be used in order to purchase a property.
Test the property:
This is a good way to actually get familiarized with the property. Buyers will spend time in the property before they actually purchase it. This means that they will know the pros and cons of living in the property.
Less cost in terms of moving:
If the buyer is really interested in the property, they will buy appliances and furniture. This will result in a lesser cost instead of moving to a new apartment or a house.
Stabilize the price:
In this kind of contract, the buyer has the power to stabilize or lock in the purchasing price. This is a good idea in some cases. Especially that nowadays the cost of living is continuing to rise up.
This means that while you are living in the said property, you do not have ownership yet. This means that the title of the property is not in your name yet. This will result in some restrictions especially in renovating.
Issues with the house:
As the title of the property is not yet in your hands, there could be some issues with the lot area. This will mean that once you buy it the responsibility will fall upon you. It is important to have a thorough home inspection.
Tendency to lose money:
This will happen only if after renting the property, you opt not to buy it. This means that you will lose all the extra amount you have paid in order to own the said property.
Fluctuating home prices:
As there is no certainty about the market, there is a tendency that prices for houses will suddenly decrease. In this kind of contract the pre agreed price will stay the same. You will be lucky if the landlord is willing to use a contract amendment to negotiate the price.
For the Side of the Seller:
As not everyone has the ability to immediately get a loan and purchase a house, this kind of arrangement will attract a lot of potential buyers that would like to purchase a property in the near future.
Opting to rent out the property before selling it will result in a stable source of income that can be used for other things as well. This will mean that you will have a steady source of income.
The ones that are attracted to this kind of contract are those people that will eventually want to settle down and own a house. This means that the property will be properly taken care of.
Price is flexible:
This means that the landlord may increase the asking price for the rent or the purchasing price. A lot of people would actually take on this opportunity. Rent-to-own contracts are hard to come by. This is why most people, specifically those who are wishing to own a property, will gladly accept this offer.
This means that the buyer still has the right to choose whether he or she will actually purchase the property before the term of the contract will end. There is no certainty in the side of the seller that the property will be sold.
For landlords who are in need of an immediate large amount of money, this is not the option for you. RTO is a slow process. This means that you will not earn the expected amount of money immediately.
Buyers will discover flaws:
Throughout the duration of the rent or lease term, the buyers might actually discover new flaws in the property. This will lead to them being discouraged in purchasing the property.
Fluctuating home prices:
For the side of the seller, there is no certainty that he or she will get the best out of this arrangement. There is a tendency that prices of properties will suddenly increase.
What is a Contract for Deeds?
A contract for deed is a contract agreement between a landlord and the tenant. This is a type of contract where the tenant will own the property while he or she is still paying the monthly rent. But, the legal title will still remain with the landlord. The tenant will only claim the title for himself or herself once the final payment is given.
What is the Difference between Lease-Option Contracts and Lease-Purchase Contracts?
Both these kinds of contracts are applicable to a rent-to-own contract. However, there is a major difference between these two. It is important to know them to avoid scams and disputes. A lease-option kind of RTO contract is where the buyer who is renting the property is given the right to choose whether he or she will purchase the property by or before the end of the term. He or she is not obligated in any way to purchase the property or the asset. That is why it is called lease-option because the buyer has the option or the right to choose.
On the other hand, a lease-purchase kind of contract is where the buyer is obligated to buy the property or asset that he or she is renting. They are obligated to purchase it by or before the end of the term. This is dangerous if you do not fully know and understand the terms of the contract. In this kind of contract the buyer, whether he or she possesses the means to buy the property, is still obligated to purchase it.
A rent-to-own contract (RTO) or also referred to as a lease-to-buy contract is an effective strategy and option for both the landlord as well as the buyer or tenant. This will give the buyer the power to choose whether he or she will purchase the property currently being rented. For the seller or the landlord this will be a stable source of income with the end goal of finally selling the property. This is a legally binding contract agreement between the two parties. It is a must that you understand all the terms and conditions stated in the contract.
Make use of the pieces of information written above to understand the elements as well as the process of creating this kind of contract. The advantages and disadvantages as well is stated in this article. The templates above are for you to use in order to give you an outline of what to put into your contract.