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?
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, ehow for a good overview.
In most cases an rent with option to buy is structured as follows:
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.
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:
- If you decide not to buy the home, you will lose your initial premium.
- 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!
While the other people have tried to answer your question as thoroughly as possible, I fear they are entirely incorrect in answering your question itself as it stands. The answer is that there are no usual terms. There are a handful of different options coming out now for this exact scheme. Examples include the UK Governments "Help To Buy" scheme. Accomodation is offered at a normal rate, and a small portion of the rent is set aside each month. At the end of a fixed period, that money becomes a deposit which the letter hands over to a mortgage provider who accepts it as a deposit.
This might well be a terminology thing, since the other scenario which people described falls into the same name you've used. That scenario is where the investor who owns the property is considering sale of the property, and is happy to negotiate a price up front for the next year. Usually the rent and price is higher than the market rate because if the market goes well over the next year they could end up out of pocket. Putting that into perspective, over that year they are gaining their $1,000 a month or so, but having $100,000 invested means a return of 12%. If the property value is over $250,000 which I believe to be more likely, they are achieving a return of (I think) 4.8%. That's not a bad rate, by any means, but realistically they are losing a bit more for maintenance, and they could be making more from their money. If the market were to go up in that time by more than 4.8% (my house, for instance, increased in value by over 15% in the last 12 months), they are making a substantial loss since you are getting a house at 15% below the market rate. The total works out to a 10.2% loss for them.
Note that I don't know the US housing market at all, I'm speaking mostly from my experience of the market here in the UK. This is what I hear, what I see, and what I've played.
To summarise a bit: Make sure you check your terms before signing anything.