Rent-to-Own Agreement: What Is It?
A rent-to-own agreement is a special type of contract which is equal parts rental agreement and stipulation for future purchase. Typically, such an arrangement will include terms that meet the legal requirements of a lease agreement, which simply establishes the rental relationship and identifies the terms and conditions in the same way as any other lease agreement . Rent-to-own agreements (also known as "lease purchase options" or "lease with an option to purchase agreements") are generally longer in duration than lease agreements for periods of months or a year and permits the tenant to eventually make the property their own if the terms of the agreement are properly met. Such agreements are governed by Florida’s Uniform Commercial Code to the extent that they may be considered security interests because they convey ownership of the subject property.
Provisions Unique to Florida
Florida has specific laws that apply to the practice of rent-to-own agreements. For instance, Florida law requires that landlords comply with the security deposit statute when collecting a deposit as a part of a rent-to-own agreement. Florida Statutes Section 83.49(1)(c) provides that, unless otherwise agreed, the lessor who demands or receives a deposit shall hold and apply the deposit in accordance with the security deposit statute. This section further provides that the clause within a rent-to-own agreement releasing the landlord from complying with the security deposit statute is invalid.
Further, pursuant to Florida Statutes Section 83.47(3), a lessor must give the lessee at least 12 months’ notice of any increase in rent or change in rental terms if the lessee has made one or more rental payments totaling the equivalent of one year’s rent.
Advantages of the Rent-to-Own Agreement
Rent-to-own agreements offer advantages for both tenants and landlords. Tenants benefit from the opportunity to build equity, test out a potential new home, or save up for a more secure down payment. The flexibility of a rent-to-own agreement benefits the tenant in many ways, offering a certain amount of security without the full responsibility of ownership.
The landlord benefits from the same security. If a tenant decides to move out prior to the lease ending, for instance, they may forfeit their down payment. Rent payments from the tenant could be higher than they might be, were the tenant only renting. A successful tenant may ultimately make it easier for the landlord to sell, or secure a buyer for the home.
Short-term leases and other waivers must be included in the final agreement and apply for the duration of the agreement. In some cases, a buyer can waive their right to the homestead exemption and agree to forfeiture of the deposit if they fail to fulfill their end of the bargain.
Common Problems that Occur
Rent-to-own agreements can potentially lead to negative outcomes for both the landlord and the tenant-buyer. For the landlord, the risk of a tenant failing to go through with the purchase after they have already established residency in the unit poses a significant problem. With the tenant making mortgage payments, the landlord may overlook safety and maintenance issues in order to avoid being found in violation of the implied warranty of habitability. Moreover, shopping around for a standard residential lease could leave the landlord financially vulnerable if the tenant decides not to purchase the property. And as always, failing to follow the strict requirements for these agreements set out in Florida law could lead to serious legal ramifications for the landlord, up to and including losing the property. From the perspective of the tenant-buyer, the potential for litigation, fraud, and misrepresentation also loom largely. The amount of tenant-buyer money that goes into repairs and improvements may be wasted if the home is not purchased. And if the landlord plans to make the improvements after the sale, the tenant-buyer may face lengthy delays before their new home is move-in ready. Confusion as to which party is responsible for what in the event of repairs or damage may lead to friction early on or in the middle of the term. Finally, if the rent-to-own agreement is not completed due to finances or other unexpected circumstances, the tenant-buyer risks being evicted for failure to pay the full rent they signed onto once it goes month-to-month after the initial term ends.
Rent-to-Own Agreement Drafting in Florida
The terms of a Florida rent-to-own agreement must be negotiated and properly drafted to prevent disputes that can lead to costly litigation. A complete and specific document should contain the following sections:
Parties: Names of the tenant/buyer and landlord/seller
Property Address: The physical address where the tenant/buyer will be living
Rent Reserved: The actual dollar amount of the monthly rent payment, for example $1000 per month. This section should also state that the tenant/buyer agrees to pay for any utilities, in addition to the monthly rent payment and that the utilities can be paid directly by the utility provider or landlord/seller.
Duration of Rental Agreement: How long is the initial rental agreement valid for? For example, 12 months from move in date.
Option Period: How long does the tenant/buyer have to buy the property? For example, if the tenant/buyer has the right to buy the unit extra time could be factored into the contract. For example, say the rental period is 12 months, the option period is 24 months, which means that the tenant/buyer is required to pay the monthly rental amount for the first twelve months, but then has up to 24 months to purchase the property. If the tenant/buyer ask to purchase the property, he/she can exercise their right to purchase at the agreed price.
Purchase Price/Price Adjustment: What is the purchase price of the property? The parties should agree on a set monetary figure, for example, $140,000. Or the price can be adjusted from the rental amount. For instance, the purchase price can be capped at $1000.00 (which is the monthly rent) for each month in the rental period, which would be $21,000.00 ($1,000 x 21 months). Then, the purchase price could be $121,000.00 ($140,000 – $21,000). Remember, the purchase price is subject to the rise or fall of the market and appraisal of the unit . As a result, the parties may want to include a contrailing clause that would require an appraisal in the event they cannot agree on the purchase price.
Tenant/Buyer’s Rental/Housing History: Include a statement about how many rental properties the tenant/buyer has had in the last five years and whether the tenant/buyer has ever been served for an eviction.
Arbitration Clause: In the event of a dispute, both parties must agree to try arbitration before they bring suit against each other. This section also needs to indicate how the parties will resolve a dispute if the arbitration is unsuccessful. For example, the tenant/buyer can bring suit against the landlord/seller provided that the dispute is $2,500.00 or less. If the dispute is greater than $2,500.00 both parties must agree to binding arbitration.
Fixtures and Repairs: Fixtures include anything that is physically attached to the building to the extent that once it is removed it cannot be put back into the original place without the help of a contractor. Since fixtures are already part of the building in question, they do not go with the property when sold. The parties should clearly identify the fixtures in question, what will be repaired and when the repairs will be completed.
Disclosure of Mortgage Lien: In the event the landlord/seller has a mortgage on the property, the tenant/buyer should be aware of existing liens. Specifically, how much is owed and if there have been any missed payments. Missing mortgage payments can lead to foreclosure proceedings by the mortgagor. The tenant/buyer would be at risk of not being able to purchase the property or having their money keep them from doing so.
Default Provisions: In addition to eviction, paying rent late will result in additional financial penalties to the tenant/buyer.
Protecting Yourself in a Rent to Own Agreement
The potential tenants and landlords can protect themselves in a rent-to-own deal
Research The Title
Before you get too far into the rent-to-own process, it is extremely important that you conduct a thorough title search on the property. This search will find open judgments and liens, easements, and whether or not the person selling the property has the right to sell the property, all of which must be taken into consideration before determining whether or not the arrangement is legally sound. If a judgment is filed against the potential tenant (or tenant’s spouse), it will likely become a recorded lien against the home if you go through with the deal.
Don’t Skip the Attorney
Although some people may see hiring attorneys to draft a rent-to-own agreement as unnecessary, the reality is that without one, you are taking a risk. A qualified attorney can help you with issues concerning money upfront, deferred portions of the price, and the handling of the deed on default.
Read Before Sign
It is just as important for a potential buyer to have read and understood the terms of the rent-to-own agreement before committing, as it is for a landlord to do the same. For example, the rent-to-own agreement may contain different standards for the methods by which successive monthly payments are made. If you don’t read the entire agreement, make sure that you have a qualified third party look it over before you sign. Be sure to discuss the deed with your landlord, and see that you have the items covered that we discussed above.
Rent-to-Own Success Stories
Rent-to-own agreements can lead to successful homeownership under the right circumstances. Main Street Florida is a nonprofit organization whose goal is to facilitate affordable, long-term housing solutions for low to moderate income families in our state. They help families buy a home using a rent-to-own program. Their homes are "move-in ready" and the properties are financially sound and affordable. Their inventory consists of homes and condos that have been in foreclosure or are currently under threat of foreclosure. Their tenants are given time, usually 2 to 3 years, to repair their credit and obtain the necessary financing.
Derrick and Karen have two young children and would like a home where they can feel secure. They are tired of paying rent without building equity. They are also frustrated with their poor credit due in part to medical bills. As a result, when Derrick and Karen walk into a bank, they are told they do not qualify for a loan. However, from the outset Main Street Florida offers them a two-year lease for the property of their choice at $1,000 per month. Derrick and Karen are told that $250 a month of their rent payment will go toward their down payment. They are also able to purchase the home through the agreement of seller financing. After two years, Karen’s credit has improved and she finds a job that pays better. Derrick and Karen understand the requirement that they obtain conventional financing within three years. Accordingly, Derrick and Karen apply for an FHA loan with a down payment. Because of their consistently on-time payments and improved credit ratings, they qualify for the loan. After paying off the balance of the down payment to Main Street Florida, Derrick and Karen become homeowners.
Mike is single and in his early thirties. He recently secured a new job in Orlando. Because of his poor credit rating, he is unable to qualify for a loan to purchase a house. Additionally, he does not have significant savings or the necessary funds to provide earnest money to submit an offer to purchase a property and then to pay for the home inspection and the appraisal. Mike is renting a room in a home and paying $500 per month. He is frustrated about feeling stuck in his current situation. Main Street Florida offers Mike a two-year lease for the property of his choice at $1,000 per month. Mike also learns he is required to make a 2% down payment and that $250 a month of his rent payment will apply towards his down payment, but he is not charged for the property management fee. Ultimately, he recognizes he can afford to buy a starter home.
Does Rent-to-Own Make Sense for You?
One of the most beneficial aspects to rent-to-own agreements in Florida is the flexibility they offer, however, renters and sellers do have to decide what is right for their needs. A prospective buyer, for example, will have to ask themselves the following questions: Will my credit be high enough by my end of my agreement to qualify for a mortgage? Can I afford the monthly rental fee, plus the small amount extra that is tacked on and set aside for my down payment? Is a lease-to-own agreement more affordable than a typical lease in my area? Will repairs or needed upgrades to the home be excluded from the rent, and transferred to the seller to cover? For a seller , the following points must be considered: What monthly rental amount will I receive and is it the full market value of my home? Will a lease-to-own agreement cover property taxes and insurance or will those costs fall on me as the seller? Am I selling to an individual around my age, and how will that effect the sale? How long do you expect me to hold my home for my buyer and does that fit into my plans? Not everyone will be eligible for a rent-to-own option agreement and even if they are, it may not be the right choice for either candidate. It is up to each party to do their research and determine whether a lease-to-own arrangement is right for their particular situation.