Rent With Option To Buy

Through the past 25 years of my real estate career, the term has come up many times: "Rent With Option To Buy."  Almost always from a prospective tenant customer, who had no idea what it really meant, yet sensed it would be a cool thing to ask about, because it was mentioned around the water cooler at the office.  


In a nutshell, renting with an option is a deal struck between a tenant and the landlord, which could lead to the tenant buying the home in the future.  It can be a great thing for a renter, who is having current difficulty with a divorce, job change, credit score, etc., but has a favorable future.   Usually, a non-refundable deposit is made to secure the deal.  If the tenant does not follow through, the landlord keeps the money.  Also, the deal can be crafted to put a portion of the monthly rent toward the future down payment.


Let's say there is such a deal here in Flagler County, Florida.  We have many rental properties in Palm Coast  zip codes 32137 and 32164... also in Flagler Beach zip code 32136.  If a home has a current market value of $250,000 and rents for $1,500/month, one scenario could look like this:

• Purchase agreement is entered into for $265,000, to close in two years on 08/04/2013.
• Tenant/Buyer gives a $15,000, non-refundable deposit to the landlord.
• Monthly rent is set at $2,000 and $500 of that goes toward the purchase price.  That's $12,000 over the 2 years of the lease.
• At closing, the $15,000 deposit and The $12,000 accumulated funds, reduce the purchase price of $265,000 to $238,000.
• If the tenant does not qualify for a mortgage at that time, or does not follow through, those monies are the seller's.  On the other hand, if it goes, the tenant stays in the house and enjoys the benefits of the forced discipline of the process.

There are a host of considerations, such as "where the market goes."  If it screams upward to $300,000, the seller will feel pain... On the other hand, if it falls to $200,000, the buyer will be trying to walk away and cut his losses.  Then there are little things like, "If the rent is late, that month's contribution does not count," etc., etc.  As always, whether you are the buyer or the seller, it may be a great idea to have an attorney review your lease-option contract... before you sign it... so you go in with your eyes wide open!