Guidelines on putting together a Rent-to-Own Agreement
Its important to have a Rent-to-own setup correctly at the beginning for the best chance of approval when it comes time to complete the purchase process. Here are some tips on how to do that!
1. Lease agreement to include Right to Purchase option disclosing the required up front deposit and breakdown of what portion of monthly payment goes towards rent and how much goes towards the purchase.
2. Only payments in excess of Economic Market Rent are eligible as source of down payment. To be thorough you can have a supporting letter of economic market rent from a certified appraiser done at the time of the agreement. A full appraisal with economic market rents will likely be required at closing.
If current economic market rents are significantly higher than when you started you may run into issues with how much of your original payment can go towards the purchase
3. Register the agreement on title (Caveat) to show buyers interest in the property. This will also protect the buyers right to purchase the property if the sellers were to entertain selling it during their agreement.
To protect the buyer, the funds going towards their down payment should be put into a trust account and not given to the sellers directly.
4. Once ready to complete the transaction the Purchase Price is to be based on what was outlined in the original agreement and not on the present value of the property.
If the appraisal comes in lower than your original agreed upon Purchase Price the buyer will have to make up the difference with the down payment or the purchase price will have to be reduced
5. Provision for the prospective buyers to be Entitled to a Refund of the amounts set aside as down payment in the event the sale does not proceed (demonstrates purchase price is not being over-stated to take into account the down payment)
The buyer could put down a deposit that they would lose if they did not proceed with the purchase, but have a clause that states they would retain all funds put in trust towards their down payment.
Need to be able to provide a history of monthly deposits showing proof of payments made or accumulation of funds in trust account