How Lease-to-Own Agreements Can Benefit Landlords and Tenants

A lease-to-own agreement, also referred to as a lease purchase agreement, is a great way for tenants to find their next home while still preparing their finances for the big move.

Landlords and tenants both benefit from a lease purchase agreement, but there are important considerations to keep in mind before moving forward. Here’s everything you need to know about lease-to-own agreements as a landlord.

What Is a Lease-to-Own Agreement?

A lease-to-own lease (or rent-to-own) is a rental agreement where the tenant rents the property with the intention of buying it at the end of the lease term. These types of lease agreements make selling your rental property to a tenant easier and more enticing for them since they’ll already be moved into the property.

The agreements are typically used in the following two situations:

  • The landlord is having a hard time selling the rental property
  • The landlord already purchased a new home and is looking to rent or sell the old house

How Does a Lease-to-Own Agreement Benefit Landlords? 

Landlords benefit from lease-to-own agreements for a few reasons. Offering a tenant a lease-to-own agreement can make selling your property much easier. 

  • Attract responsible tenants: Most tenants with first-time homebuying intent are likely to take care of your property since they’re looking to buy it once the lease ends. 
  • Locked-in purchase price: The housing market is always changing, but a lease-to-own agreement ensures the agreed upon purchase price remains the same.
  • Upfront payment from buyer: Most lease-to-own agreements require the buyer to put down a non-refundable option fee to grant them exclusive rights to buy the property. 
  • Default benefit: If your tenant decides to default on buying your property, you’ll be able to keep the down payment once the lease ends.
  • On-time rent payments: Tenants looking to sign a lease-to-own agreement are usually financially ready a mortgage, meaning there’s a higher chance you’ll get paid on time each month.

How Does a Lease-to-Own Agreement Benefit Tenants? 

Lease-to-own agreements are ideal for tenants who want to buy, but still need time to improve their financial health. Tenants can also: 

  • Actively save for a down payment: The rent credits your tenant receives can be put aside each month to go towards their down payment once the lease ends.  
  • Improve credit score: With tools like CreditBoost*, tenants currently renting can report their on-time rent payments to Transunion to contribute to their FICO 9, FICO XD, and VantageScore credit score all in one place.
  • Build equity: The tenant can build equity if the home value increases above the agreed upon purchasing price while renting.

If you’re confident a lease-to-own agreement will benefit you and your tenants, get started with Rocket Lawyer’s Lease-To-Own Agreement.

What to Include in a Lease-to-Own Contract 

There are certain aspects of a lease-to-own rental agreement that operate differently from a normal rental lease. Here are the following sections to include in your lease-to-own contract:

1. Length of Rental Lease

The length of the lease, or lease period, will notify the tenant when they’ll be responsible to buy the property at the end of the lease. The lease end date is also potentially the purchase date, so the tenant will need to have a mortgage already to avoid breaching the contract.

2. Price of Property 

Typically, the asking price of the property is set when you sign the lease-to-own agreement. Landlords and tenants who are entering a lease-to-own agreement should discuss what will happen if the value of the home changes significantly during the lease term.

3. Option Fee

The agreement will need to include an option fee clause, which will legally require the landlord to sell the property to the tenant, even if the landlord changes their mind. The option fee is usually paid by the tenant to secure the option to buy the home at the end of the agreement. Option fees are typically non-refundable.

4. Rent Credit

This is a monthly fee that goes toward the tenant’s down payment if the tenant chooses to buy the home. This fee is typically also non-refundable, so if the tenant chooses not to buy the property, then the landlord keeps the money.

If the tenant buys the property at the end of the lease term, then they will receive the rent credits back. Rent credits are meant to go toward the down payment for the house.

Create a Custom Lease-to-Own Contract on Avail

Once you’re ready to create a lease-to-own agreement, you can easily do so with the right property management software. With Avail, you can create state-specific lease agreements that comply with local ordinances, are customizable, and can be signed online for free.

Create an account today to get started right away.

*CreditBoost results may vary by individual.