It can also, of course, be due to the buyers’ own lack of a sufficient down payment. “Cash poor” buyers – with steady, verifiable, and upper middle class incomes – may be an attractive option for a motivated seller to consider as an alternative way to sell their home. Of course, such transactions are not free from risk for either the seller or the buyer. However, under the right conditions, with the right buyers, a “rent with option to buy” can serve the needs of both parties.
Typically, the seller will want to enter into a conventional rental agreement that protects the property and their interest in it. In addition to providing for a fair rental amount, the rental agreement must carefully allocate responsibility for all maintenance and repair issues. It must also provide the seller with adequate security and an ironclad “exit strategy” if the ultimate sale appears unlikely. The agreement will mirror the conventional lease except that it will grant the “tenant” the opportunity to purchase the property at a specific time or times, and will generally allocate some portion of the “rent” to the down payment.
Most buyers will want to lock in the purchase price along with all of the other terms and conditions of closing. While this may not be problematic for the seller in many instances, it can be disastrous if market values increase significantly during the rental term. The more appealing option is to establish a “base sales price” with a reasonable “escalation” clause to allow for the selling price to be adjusted if the market improves.
Renting with an option to buy can enable a seller to avoid having their house on the market for a prolonged period of time, provide some income flow along the way and open up the market to buyers who might just need a little “help” in qualifying for loans. The rental period affords the buyers time to save towards the down payment, allows them to recoup a portion of their rental payments and apply it toward the purchase price, while giving them an opportunity to “test drive” the home.
The authors maintain separate practices and collaborate from time-to-time representing sellers and homebuyers in real estate transactions. You may contact Barbara Albom at firstname.lastname@example.org and Nicholas Ferrar at email@example.com.