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What are the usual terms of a "rent with an option to buy" situation? Is the selling price negotiated ahead of time? What does the renter potentially sacrifice except losing the equity of the rent?

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I have not dealt with these, but I think it would be neat if a portion of your rent went towards the eventual purchase price of the home. –  chrisfs Feb 19 '11 at 4:44
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3 Answers

Things I would specifically draw your attention to:

--the contract typically allows for an "option" to purchase; it does not typically compel purchase, although this is seen

--the purchase price is negotiated before anything gets signed

--the option to buy is typically available to the renter for the period of the lease contract (ie., if it's a 12 month contract the renter can opt to buy at any time in that 12 months)

--the amount of rent paid over time that will be applied to the purchase price is negotiated up-front before anything gets signed

--rent is paid at a slight premium (as Joe notes, if the rent should be $1000 per month, expect to pay $1200 per month)

--if the renter walks away they walk away empty handed; they do not get back the premium

Having said all that - it's a contract negotiated between renter and seller and all of this is negotiable.

See also, http://www.ehow.com/how-does_4563974_rent-own-work_.html for a good overview.

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Just add that the extra rent paid (in your example $200) goes towards the purchase of the house in the event that option is exercised. The extra money is kept by the owner if the option is not exercised. –  MrChrister Feb 20 '11 at 1:24
    
@ McChrister - Thanks. That's the "premium" I'm referring to. "Extra rent" is probably the better term. –  gef05 Feb 20 '11 at 13:41
    
Premium can go to purchase, but not always, that point is part of the negotiation. The option to buy means I (the tenant) have a potential windfall should the market heat up. The owner may consider that as part of the cost. i.e. as with a stock option, time premium is just that. –  JoeTaxpayer Jan 19 '12 at 17:14
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The typical deal would be a premium to the normal rent, say $1200 instead of $1000, in return he has the option to buy the house at a fixed price by the end of the agreement term.

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In most cases an rent with option to buy is structured as follows:

  1. The renter/buyer will place a deposit/premium (not the same as a security deposit) that purchases the option( the right ) to buy the home at a future date at a specific price.

  2. The renter / buyer will often pay extra rent in addition to market rent. Many times this additional rent is contracted to be applied to the purchase price of the home.

The risks to the renter/buyer are as follows:

  1. If you decide not to buy the home, you will lose your initial premium.
  2. The home's value may not equal your agreed upon price. This will cause not just monetary problems, but also problems in financing the home.

Also, something to note:

Many people will recommend that you use the additional rents to be applied specifically towards the downpayment. Be wary of this. There are no institutional lenders available today that will allow the additional rent money to be applied towards your downpayment. That means you must come up with the downpayment in cash before closing. The additional rent payments can be used towards the price.

Hope that helps. Good luck!

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