Difference Between Contract For Deed And Rent To Own

Difference between contract for deed and rent to own

Difference between contract for deed and rent to own

Rent To Own

Rent to own financing is also known as: lease option, lease-to-own, option-to-purchase, rent with option to buy, etc.

As the name would suggest, you are renting the home with the intent to purchase it within a predetermined time-line (usually 1 to 3 years).

Virtually 95% of the contract is still going to be a standard lease agreement renters are accustomed to in Minnesota. This does mean credit matters very much as there will be an application fee where the landlord/property management company pulls credit.

Difference between contract for deed and rent to own

It is therefore important for tenants with credit issues to find out the landlord’s qualification criteria as early in the process as possible.

The option part of the rental agreement is ultimately what makes it a rent to own, because the landlord and tenant agree to a purchase price upfront when signing the lease agreement.

For example, a tenant signs a lease agreement on a home they love with the landlord and agree upon a purchase price of $200,000.

At any time within the lease agreement the tenant can purchase the home at this pre-determined price; typically once they are able to get financed by a bank.

The obvious benefit here for the tenant is they are locking in today’s home prices for something they plan on buying in the future.

If home prices rise they are gaining equity in the home.

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On the other hand, if home values decrease the tenant does not need to move forward with the purchase. The tenant is able to avoid being “upside down” on the home and move on.

A rent to own also is a way for the tenant to reserve the house.

Difference between contract for deed and rent to own

During their lease agreement the landlord can not sell the home to anyone else. On the downside, it does lock the renter into the specific property when there could be more desirable houses available; especially if they find problems with the home once they start living in it.

As discussed below there willl potentially be consequences if the tenant is not able to purchase the home by the end of their lease agreement.

Difference between contract for deed and rent to own

Besides purchase price, the following are additional terms that the landlord may or may not choose to include in the option section of a rent to own agreement.

  • Option Down Payment – Instead of taking a security deposit and one month’s rent like you would see in a typical lease; a landlord may choose to ask for a non-refundable down payment ranging from 3 to 5% of the purchase price.

    This is to give the landlord security since the intent is to purchase the home (and the main reason landlords agree to do a rent to own versus a normal lease). As long as the tenant purchases the home this down payment will go towards their financing, otherwise the landlord will keep it when the tenant moves out.

  • Monthly Rent Credit – A monthly rent credit is where a percentage of the tenant’s rent is credited towards either the purchase price or down payment (tenant chooses).

    For example, out of $1600/month rent $150 shall be considered a credit.

    Rent to Own vs Contract for Deed

    The landlord will still retain this during the lease agreement, and if the tenant fails to exercise their option to purchase the home landlord gets to keep the rent credit.

  • Home Maintenance Responsibilities – Tenants in a rent to own agreement should be aware that most likely they will take on minor home maintenance responsibilities since the intent is still to eventually purchase the home.

    Outside yard work and fixing leaky toiles are some examples.

    Difference between contract for deed and rent to own

    However, major structural items such as a roof should not be part of this as the landlord will be carrying homeowner insurance on the property.

    Make sure to read the fine print in the rental agreement to ensure there are no misunderstandings down the road.

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