Rent-to-Own Scenario — a.k.a. Lease with an Option to Buy

Love the house I’m renting. It’s up for sale. Not one bidder. Landlord can’t pay the mortgage, but I can’t afford to buy at this moment on my salary.

Superficial Transaction Overview:

Issue: Seller/Landlord has experienced: no success in obtaining a potential buyer for Premises; and/or- diminished income, financial hardship, loss of tenants/rent, is “upside down” on his/her mortgage (the value of the mortgage exceeds the value of the Premises), …whereby there has been significant delinquency on mortgage payments and Seller can face imminent foreclosure.

Purchaser desires to purchase the premises, however his/her credit worthiness is not satisfactory enough to qualify for the necessary financing. In addition, Purchaser has very little, if any, money to deposit towards the down payment.

Solution: Purchaser (Tenant) and Seller (Landlord) agree upon a purchase price for the Premises. The closing date is to occur sometime in the near future…usually within one (1) to three (3) years. During the interim, pursuant to a formal written lease agreement, Purchaser obtains possession of the Premises as a tenant of Seller… paying monthly rent to the Seller. A portion of the monthly rent is applied toward the Purchaser’s down payment. In addition, at the inception of the Lease, Purchaser pays a (negotiated) percentage of the agreed upon purchase price (usually 2.5%-5%) to Seller as a “Compensation Fee”. This fee is also applied to the purchaser’s down payment.

Upon termination of the three (3) years… purchaser can elect to purchase the premises… thereby having accumulated a deposit towards the purchase price. In the meanwhile, Purchaser has had three (3) years to increase his/her credit worthiness to now qualify (where before he/she could not) for a loan to complete the purchase.

Summation: Seller has enjoyed three years of income generating rent…assuring that the underlying mortgage securing the Premises could be paid…thereby eliminating potential foreclosure and/or Bankruptcy Protection Filing.

Purchaser has had the benefit of “building up equity” in a rental scenario.

Buyer and Seller obtain the short-term reprieve they both desperately needed, given their precarious financial situations.

Risk: The purchase price that is agreed upon at the beginning of the lease is “locked in” up until the date of closing. Both parties assume the risk that the market value of the home may increase and/or decrease by the time closing on the home is to occur.

“When you got nothing… you got nothing to lose”. -B. Dylan

DISCLAIMER: THIS ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TO BE RELIED UPON AS LEGAL ADVICE. NO ATTORNEY CLIENT RELATIONSHIP IS CREATED BY THIS PUBLICATION. AN INDEPENDENT LEGAL OPINION SHOULD BE OBTAINED BY THE READER.