You see an awesome home available, but it is listed as a rental property with an option to buy. This practice is called “rent-to-own” or “lease option.” If you would like to consider renting a home with the option to purchase later, here’s what you need to know.

1. Why do People Rent-to-Own?

There are many reasons that people who want to buy a home go for a rent-to-own arrangement. They may need time to save up for a down payment or improve their credit reports. Buyers could also just want an opportunity to try out the neighborhood, which is particularly useful if you are moving from far away.

Homeowners may decide to accept a rent-to-own contract if they are having trouble selling the home as-is. A lease option provides tenants who are generally more engaged with home upkeep, while giving owners more rent money from the home before they sell.

2. What Does a Lease Option Contract Include?

Like a purchase contract for a home, the lease option contract should be very specific. In this case, you are agreeing to make rent payments with the option to buy the property at the conclusion of a specified term, usually 2-5 years. The contract should include:

  • sale price for the home
  • total rent payment and any money put aside for a down payment
  • clear assignment of responsibilities for payments
  • identification of any liens on the property
  • exit clause, in case you decide not to purchase the home

Before you settle on a sale price, you should request an appraisal and a home inspection to alert you of any problems that may need repairs before you can buy. Make sure you understand who will be paying the mortgage, property taxes and insurance, as well as utilities, waste removal and other monthly services.

3. Do I Get an Exclusive Contract for the Home?

If the lease option paperwork has been done properly, the seller agrees to give you exclusive access to purchase the home during the term of the contract. You may be able to buy the home at any point in the term, if the contract so states.

The sale price remains the same, which may save you some money if the home appreciates over time. However, if the home loses value, the sale price stays at its higher value. Before you agree to the contract, ask a real estate agent if the area has good growth potential. Otherwise, you may struggle to get a mortgage for an amount that far exceeds the property’s appraised value.

4. What If I Decide Not to Buy the Home?

It is difficult to predict what your life will be like a few years from now. There are circumstances in which you may decide that you no longer want to purchase the home you are contracted to buy, such as a change in employment or a need to have a larger home. If the home has lost significant value, you may wish to renegotiate the purchase. In these cases, you may have to take as a loss the money you invested on top of rent, and vacate the home quickly so that the owner can make other plans.

A lease option can be a great opportunity for a lot of people who want to make their dreams of homeownership come true. If you do your homework and ensure the paperwork is correct before you sign, you will set yourself up well to buy a home in a few years.