Lease-Option Purchases

Quick Takeaways

“A lease option is a contract in which a landlord and tenant agree that, at the end of a specified period, the renter can buy the property at a specified price. The tenant pays an up-front option fee and an additional amount each month that goes toward the eventual down payment.”
Lease option contracts are referred to by many names, such as a “rent to own” agreement, but they all mean the same thing!
Make sure to get details on the structure of the deal, including the agreement length, the option fee, and whether you or the landlord are responsible for maitenance and home repairs

Source: What to Know About “Lease Option to Buy” or Rent to Own Homes (Yahoo! Finance, Feb. 10, 2023)

Lease-Option purchases are a unique way to achieve homeownership. In a Lease-option purchase, often called “lease-to-buy” or “lease-to-own,” a renter enters into a legal contract with the owner of the property stating that a percentage of the rent will go toward purchasing the unit. Often, the purchase price and length of agreement are pre-determined. This method is great for those who need extra time to build up credit and savings or who simply want to test out an area before committing.

With record high home prices and record low inventory, would-be buyers are looking for creative ways to purchase homes, lease-option purchases included. Multiple startups have gotten in on the action, including Pathway Homes, which just spent $750 million dollars on lease-to-own options. This method can be used successfully in commercial real estate as well, especially for smaller, family-owned businesses.

Lease-Option purchases do come with a variety of tax and contract considerations. Make sure you familiarize yourself with IRS write-offs, property tax law, and IRS reclassification. The government has a variety of sources, listed above, to help you understand the ins and outs of lease-option purchases!

See References for more information.

References

NAR Library & Archives has already done the research for you. References (formerly Field Guides) offer links to articles, eBooks, websites, statistics, and more to provide a comprehensive overview of perspectives. EBSCO articles (E) are available only to NAR members and require the member's nar.realtor login.

Lease to Own: The Basics

Everything You Need to Know About Rent-To-Own Homes (Rocket Mortgage, Jan. 31, 2024)

With a rent-to-own property, a buyer may pay an option fee, also called “option money” or “option consideration.” It’s an upfront, nonrefundable fee paid to the seller. While the fee amount is negotiable, it’s usually 2% – 7% of the property's value.

The fee gives the buyer the exclusive right to buy the property later. If the buyer doesn’t buy the property, they don’t get the option fee back. If the buyer decides to purchase the property, the option fee is typically credited toward the final purchase price.

How Does Rent-to-Own Work? (NerdWallet, Nov. 27, 2023)

Simply put: You pay a little extra to help yourself save for a down payment. In a rent-to-own agreement, this happens in two ways:

Rent credits (paid monthly): Sometimes called rent premiums, these are extra payments you make in addition to rent.

An option fee (paid once, upfront): This nonrefundable deposit is typically 1% to 7% of the purchase price. For a $200,000 home, that’s $2,000 to $14,000.

Rent-to Own Homes: How the Process Works (Investopedia, Mar. 28, 2023)

Rent-to-Own contracts have many important clauses that buyers need to be aware of. Depending on the contract, renters may be responsible for purchasing the house even if they can no longer afford it. Buyers also need to make sure they pay close attention to taxes, home maintenance, and how much principle will be applied to your future home.

Lease Purchase Agreements: Benefits for Buyers and Owners (Forbes, Feb. 16, 2023)

“A lease purchase agreement—also known as a rent-to-own or lease-to-own agreement—lets someone rent a property for a specified period of time with the promise to purchase it at the end of the lease term. The owner is contractually obligated to sell the property to the renter when the end of the term hits. Likewise, it also obligates the renter to buy the property from the owner.”

Case Studies & Examples

Rent-to-Own Contracts Offer Kansans Low Barrier Path to Homeownership – at a Higher Risk of Fraud (KMUW, Jan. 22, 2024)

Rent-to-own buyers often spend time and money fixing a property, said Jason Roach, the chief attorney for the Sedgwick County District Attorney’s Consumer Protection Division. That’s risky because those investments – as well as any up-front cash payment – could be lost if the buyers don’t end up getting title to the home.

In rent-to-own contracts, the buyers typically don’t get the title to the house until they’ve completed all the payments.

These Rent-to-Own Homes Programs Can Help You Get into That House (HomeLight, Jan. 16, 2024)

Well, here’s some good news: there are multiple rent-to-own programs and lease-to-own options available to prospective homeowners. We’ve reviewed a variety of programs and sought advice from an experienced agent to help you understand your options.

Ahead, we compare four of the most reputable rent-to-own programs to help you answer the question, “Is rent to own a good idea?”

A Lehigh Valley Landlord Gives His Renters a Chance to Buy Their Home. Now a Lawmaker Wants to Help (Morning Call, Feb. 2, 2024) E

To help streamline the process, Freeman proposed House Bill 1922 to help potential homebuyers, especially those with lower incomes, have a chance to own instead of permanently renting.

“It’s for people of lesser means who are looking for a way to get homeownership but to do so in a more easily navigable way,” Freeman said.

The program would be administered by the Pennsylvania Housing Finance Agency, Freeman said, and would have built-in safeguards for the tenant.

In this program, under the lease-to-purchase agreement, a portion of the rent would go toward an escrow account to pay for closing and down payment costs. When there are enough funds in the account, the tenant would then obtain a mortgage and take ownership of the property.

The Pennsylvania Association of Realtors said it was aware of the legislation and is studying it.

Divvy Wants to Make Rent-to-Own Deals Easy. Many Customers Find Them Hard (The New York Times, Aug. 1, 2023)

Approximately 10 million Americans have entered into a rent-to-own deal at some point in their adult lives, according to estimates by the Pew Charitable Trusts. People who sign up for such deals typically have little if any savings and are often evicted from their homes after falling behind on rent. Others are forced to walk away because no bank will write a mortgage for a house that’s in bad shape.

Out-of-State Phoenix Developers Plan Thousands of Build-to-Rent Units In Phoenix Metro (Phoenix Business Journal, Mar. 1, 2023)

“Two out-of-state developers plan to build nearly 2,000 build-to-rent units across metro Phoenix — bringing a unique approach to the wildly popular niche that originated in Arizona and is taking the country by storm. Palm Desert, California-based Family Development currently has nearly 1,000 units at some level of construction, while Atlanta-based Trilogy Investment Co. has plans to match that number.”

Las Vegas Start Up Helps Clients Buy a Home, One Month at a Time (Las Vegas-Review Journal, Jan. 31, 2023)

“Las Vegas-based startup Roots Homes wants to help millennials and Gen Z purchase a home by offering more flexibility than the years it takes to save money toward a down payment — using a method known as fractional homeownership. Its first customer moved into a home in November, and the company said its 10th client is scheduled to move into a home this week. And last month, the company announced it raised $2.2 million in pre-seed funding to help fuel its growth.”

Tax Implications

Does a Rent-to-Own Option Have Tax Advantages? (The Nest)

“The renter doesn't get the usual tax breaks associated with home ownership: He can't deduct mortgage interest or claim any of the other tax breaks he'd get as a homeowner. Depending on your income and the state in which you live, however, you may be eligible for a renter's tax deduction. For example, in Massachusetts, renters can deduct up to $3,000. The owner of the rent-to-own arrangement, on the other hand, can deduct rental expenses -- repairs, maintenance, mortgage interest, travel to the house -- from the rental income the house brings in.”

eBooks & Other Resources

The following eBooks and digital audiobooks are available to NAR members:

eBooks.realtor.org

Smart Guide to Real Estate: Step by Step Rent to Own (eBook)

Investing in Rent-to-Own Property (eBook)

Investing in Real Estate With Lease Options and “Subject to” Deals (eBook)

Books, Videos, Research Reports & More

As a member benefit, the following resources and more are available for loan through the NAR Library. Items will be mailed directly to you or made available for pickup at the REALTOR® Building in Chicago.

Who Says You Can’t Buy a Home! HG 2040.5 R25w (2006)

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