refusal. This protects the renter in case the
owner decides to sell the property. The seller is protected by the deposit, the rent paid and by
putting a time limit on the lease and option. This way if the buyer does not exercise the option
to buy, the seller can then sell the house.
Rent option to buy can be a win-win situation for both the seller and the buyer.
However, there are potential pitfalls for both the lessor/seller and the renter/buyer to be
aware of.
1. Credit check. It is better to err on the side of caution by having the seller run her own
credit check. Unscrupulous potential buyers have been known to alter their credit reports to
hide an unfavorable history.
2. Get several references and check them. In today's era of privacy and discrimination concerns,
references you call may be reluctant to disclose really bad news. Therefore, a certain amount
of "reading between the lines" is probably going to be necessary. Ask indirect as well as
direct questions. An example of an indirect question might be to ask a former landlord if the
tenant's security deposit was refunded, rather than if the tenant left the property in
good condition. As a potential renter, ringing neighbors' doorbells and asking about the owner
is a good idea.
3. Contract. The time to eliminate misunderstandings is before they occur. If you are offering
the property with a rent option to buy, have a real estate lawyer draft the agreement.
If you are the renter/buyer, have a real estate lawyer explain the contract to you before
you sign.
4. Responsibilities for such things as taxes, insurance, maintenance, and even garbage
need to be in writing and agreed to. As the lessor/seller in a rent option to buy, you
should be certain the buyer is paying for what she agreed to pay for. As the buyer, it
is nice to know that the local sheriff will not be evicting you because the landlord
has not paid her property taxes.
5. Insurance. Most rent option to buy agreements provide that the tenant must provide
her own insurance on the house. As the owner, you will want to be named an additional
insured on your renter/buyer's insurance. It is also a good idea to carry your own
insurance on the property.
6. Physical inspection. As the lessor/seller, if you cannot inspect the property
to make certain it is being maintained, etc., have someone you trust or can hire be your eyes,
ears and nose.
7. Security deposit. This is an additional protection for the seller to make sure the property
is properly maintained.
8. If there is mortgage on the property check with the mortgagor to make certain the rent option
to buy conforms to the mortgage agreement.
Keep in Mind: If the rent option to buy is a sham designed (or viewed by the mortgagor)
to circumvent the alienation or due-on-sale clause in the seller's mortgage, the mortgagor
can (and probably will) accelerate the note and demand payment for the entire amount.
Because a rent option to buy situation deals with real estate, because real estate laws
are local, and because the consequences of making a mistake may be substantial,
I recommend that the agreement be draw up by a real estate lawyer and that each
party be represented by counsel.
Real Estate Lawyer
Real Estate Contract ABC's
Seller Financing
