Set up a Rent to Own Contract

When you typically purchase a home, the sale takes place soon after an agreement is reached and the closing papers are signed. However, if you do not have the good credit necessary to obtain a mortgage, but you still want to purchase a home, you may be able to utilize a rent-to-own agreement. When you enter into this type of agreement, you agree to rent the home for a certain period of time before you earn the right to exercise an option in the contract to purchase the home. This type of contract includes various important provisions including the rental provisions, option provisions, and purchase provisions. Each of these important pieces, and others, can be drafted various ways so be sure you understand the consequences of those choices.

Steps

Establishing the Contract's Framework

1. Hire an attorney. Entering into a contractual relationship with someone creates legal duties that affect your rights. Therefore, you should always have an attorney either help you through the entire contract process or to review the completed contract. Real estate attorneys will be the most knowledgeable on the subject of rent-to-own contracts so you should look for that specialty when conducting your search.
   • If you know individuals that can give you recommendations and referrals, you should ask them. Referrals are a great way to find a competent attorney so long as you trust the person making them.
   • If you cannot get help from friends or family, use your state bar's lawyer referral service. In California, for example, you can call the state bar and they will ask you some general questions about your legal issue. After the conversation, the state bar will give you the names and contact information of multiple qualified attorneys in your area.
2. Determine whether you need a written contract. Not every agreement warrants the use of a legally binding contract. The purpose of a contract is in part to protect the individuals entering into it and to provide legal remedies in case of a breach. In the case of rent-to-own agreements, a contract is absolutely needed.
   • When you rent to own, the property owner rents the home to a renter with an option to have the renter purchase the home at the end of the rental period. This type of agreement can be particularly complex, which is one of the reasons a contract is necessary.
   • In addition, all contracts for real property are required to be in writing under the Statute of Frauds. The Statute of Frauds are specific state statutes laying out certain contractual requirements. Its purpose is to decrease the likelihood of fraudulent activity by requiring certain types of contracts to be in writing and signed.
3. Analyze the basic requirements of contracts. Every legal contract is created with an offer, acceptance, consideration, and mutuality. Without these four elements, no contract exists. It is important you recognize these before writing and executing a contract.
   • An offer is a promise by you or the other party to do something in the future. In the case of a rent-to-own contract, the offer would be to rent the home with the option to purchase it.
   • Acceptance occurs when the other party accepts the offer. This can be done by signing the contract, saying "I accept", or by performing under the contract.
   • Consideration is the things of value each party gives up in order to enter into the agreement. Here, one party would give up possession (and potentially ownership) to their home and the other party would give money.
   • Mutuality occurs when you and the other party understand and agree to the basic terms of the agreement.
4. Ensure every party is able to enter into the contract. Certain individuals cannot legally enter into contracts. Generally speaking, this includes minors and individuals with mental incapacity. Contracts entered into with improper individuals are either "void" or "voidable." This determination will depend on the facts of your case and the law applicable to those facts. If a contract is "void" it cannot be enforced by either party. It is as if the contract was never entered into. On the other hand, if a contract is "voidable", it is valid and one party can be bound by its terms. The unbound party (e.g., the minor) can choose whether to cancel or honor it. If you think the other party is unable to contract, ask questions and don't sign a contract if you have any doubts.
   • Minors include people under the age of 18. However, if a minor does enter into a contract, it will be considered "voidable." The minor can choose whether to honor the contract or cancel it.
   • Individuals lacking the mental capacity to contract can void, or have voided, the contract they enter into. In most states, a person lacks the requisite mental capacity if they do not understand the meaning and effect of the words making up the contract.
5. Take part in preliminary discussions. Before you start drafting the rent-to-own contract, talk with the other party about their expectations. Doing this will allow you to understand what provisions should be included and which ones can be left out. This is a great time to have these discussions so you do not have to go back later and rewrite the contract.
   • For example, discuss the terms of the rental agreement, what the option to purchase fee will be, how the purchase will take place, and how disputes will be resolved.

Writing the Contract

1. Start with the basics. Every contract, regardless of its subject matter, should start with a preamble. The preamble needs to include the title of the agreement, the date of execution, and the parties involved. You should feel free to include any extra identifying information you feel is necessary (e.g., addresses, business names, and descriptive nouns).
   • For example, your preamble may state: "This Rent-To-Own Agreement ("Agreement") is entered into as of [date] ("Effective Date") between Ryan James ("Owner") and Trevor Benjamin ("Renter" or "Purchaser"). The property at issue is located at [property address]."
2. Create recitals. Recitals are optional and provide factual background to the agreement. They will usually lay out each party's understanding of the agreement and why it is being entered into. This section should not include any enforceable duties or obligations.
   • For example, your recitals may contain a series of 'whereas' sentences that look like this: "Whereas, Owner wishes to rent his property located at [address]. Whereas, Renter wishes to rent the property located at [address]." You would then continue with these factual statements until you are comfortable with the background you laid out.
3. Manifest an agreement. Your contract must include an exchange of promises (i.e., the consideration), and that exchange should be clearly laid out near the top of your contract. This exchange of promises will be laid out further throughout the contract (i.e., when you promise to rent the property or when you promise to pay money to rent the property) but it is important to explicitly state your promises up front. You may promise to do something you are not legally obligated to do (e.g., provide an option to purchase your home) or you may promise not to do something you have the right to do (e.g., sell your home to someone else). This provision is usually relatively standard and needs to include certain language.
   • For example, your manifestation may state: "Now, therefore, in consideration of the promises and mutual covenants set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows."
4. Include a definitions section. You need to define any terms that may be considered ambiguous or confusing in your agreement. If you fail to define these terms, you and the other party may think something means two different things and you may find yourself in a dispute. Be sure you and the other party discuss any terms you want to define and how they should be defined.
   • In the definitions section, bold each term and follow it up with your definition. Continue this until you have defined every important term.
5. Draft the rental agreement. The first body paragraphs of your rent-to-own contract will be the rental provisions. With this type of agreement, you will create a tenancy before the contract turns into a purchase agreement. This section will include a description of your lease and its terms, which will stay in effect for a certain period of time or until the renter exercises the purchase option and buys the home.
   • Include terms about the duration of the lease. Usually, this will be between one and three years.
   • Include information about the amount of rent to be paid and how that rent will be allocated to the purchase price (if at all). For example, your contract might state that rent will be owed every month in the amount of $1,200. It may further state that 25% of your monthly rent will be credited to the purchase price you agreed on. If the lease term is three years, the buyer will earn $10,800 toward the purchase price of the home ($1,200 x .25 = $300; $300 x 36 months = $10,800) simply by paying rent. In this instance, the rent charged may be slightly above fair market value because part of it will be going towards the purchase of the home.
     • You do not need to have any of the rent payment go towards the purchase price if you don't want to. In that case, rent will usually be close to the fair market value in the area.
6. Construct an option to purchase. This is the provision that gives the purchaser/renter the option to buy the home at some point in the future. In exchange for this option, the purchaser/renter will usually have to pay an option fee. This option fee will usually be paid up-front or in the form of increased rent. Some contracts give the potential buyer the right but not the obligation to purchase the home. In other contracts, the potential buyer will have the obligation to buy the home at the end of the rental period.
   • If the provision uses the words "lease purchase", without the word "option", the renter/purchaser may be required to purchase the home.
   • If the provision uses the word "option", the renter/purchaser will usually choose whether they want to purchase or not. If the renter/purchaser chooses not to purchase the home, the option will simply expire. No part of the option fee is refundable and the owner will get to keep it.
7. State the purchase price and purchase obligations. Your contract will have to lay out when and how the purchase price of the home will be determined. In some situations, the purchase price will be decided before the contract is signed and it will be included directly in the contract. In other circumstances, you and the other party may choose to determine the purchase price after the lease ends.
   • If you are the potential purchaser, you may want to lock in the price ahead of time, especially if the housing market is rising.
   • If you are the owner, you may want to wait and determine the price at some point in the future.
8. Include party obligations. Each party will be required to fulfill certain duties laid out in these provisions. In a rent-to-own contract, you may include information about how rent will be paid and allocated, who is responsible for making repairs, and who should inspect the house and get an appraisal.
   • In maintenance provisions, the potential buyer will usually have the obligation to maintain the property and pay for repairs, property taxes, and insurance.
   • Just like a normal rental agreement, you need to lay out how rent will be paid, when it will be due, and how it can be delivered. In addition, if a portion of rent will go towards the purchase price, the renter will usually be required to keep that money separate in an escrow account. Make sure you lay out all of these requirements so there are no ambiguities.
   • Before the contract is signed, most renters/purchasers will want an inspection of the home and an appraisal of its value. This happens because they want to make sure the purchase price of the home is fair and deductions are made if any large repairs have to be made.
9. Incorporate a dispute resolution clause. While most agreements will be executed without problems, disputes can arise. If a dispute does arise, you will want to make sure you have a system in place for resolving them. Usually, you will want to lay out a series of events that will trigger certain dispute resolution processes.
   • For example, you may start with informal negotiations to try and resolve minor disputes.
   • If you cannot come to an agreement, your contract may state the need to hire a mediator to get involved.
   • If mediation doesn't work, you may state that both parties need to agree to non-binding arbitration.
   • Finally, if all else fails, you may state that a lawsuit can be brought or that binding arbitration take place.
10. Use general boilerplate language. Boilerplate provisions are general provisions included in almost every contract. They usually set forth how the contract is governed and managed. Examples of these provisions include:
    • Choice of law provisions, which covers which state's laws will govern the contract
    • Severability clauses, which state that if any other provision is found to be unlawful, the rest of the contract will remain effective
    • Entire agreement clauses, which states that the agreement is complete and entire and that no other agreement is valid unless it is validly incorporated.
    • Incorporation clauses, which tell the parties how amendments can be made and validated.
11. Save the last page for signatures. At the end of the contract, you need to leave space for you and the other party to sign and execute the contract. It should include blank lines for each party and should define who each party is. This section should be at the end so each party is required to read the whole agreement before signing.

Executing the Contract

1. Offer the contract to the other party. Once the contract is complete, send it to the other party as an offer. The other party will look it over and get back to you. When you get a response, it will usually be in the form of an acceptance or rejection.
   • If you want a response within a certain time period, state that in your offer. If you do not, the other party will have a "reasonable" amount of time to respond.
   • Up until your offer is accepted, you may choose to revoke the offer. Ensure this revocation gets to the other party before they accept. Once your offer is accepted, an enforceable contract is created.
2. Negotiate necessary changes. If the other party rejects you offer, they may make a counter-offer. Go back and forth and change the contract terms as needed. Discuss the changes and negotiate with the other party. You can always ask for something in return for the promise to make changes in the other party's favor.
   • For example, if the other party wants to change the rental period from three to five years, you might ask for a reduced monthly rent amount or for more of your rent payment to go towards the cost of purchasing the home.
3. Sign the document. When you and the other party agree to all of the terms included in your contract, sign the document and have the other party do the same. If you and the other party are not in the same room, you can have the document signed electronically using various e-signature services.
   • Keep a copy of the contract for your records. If there is ever a dispute, you will need the contract in order to resolve it.

Tips

• Remember that this is an investment for both the renter and owner. Try not to shop around for other homes if you are the renter, or for other buyers if you are the owner. Your contract is a legally binding agreement.

Warnings

• Assess whether you will be able to get a mortgage if you are the renter. The purpose of renting to own is often to give yourself time to straighten out your finances. If you are unsure whether you will be able to pay a deposit and repair your credit so you are eligible for a mortgage, simply renting might be better than renting to own.

Sources and Citations

See also

• Check a Background for a Tenant
• Evict a Tenant in Texas
• Turn Your Home or Condo Into a Vacation Rental
• Evict a Residential Tenant in Ohio
• Be Aware of Hidden Costs for a First Time Renter
• Find a House to Rent That Allows Pets
• Be a Good Apartment Neighbor
• Prorate Rent
• Rent a Room in Your House
• Rent an Apartment

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