What is Lease to Own?

A lease to own contract is an agreement under which a renter has the option to buy the home, at a previously agreed upon price, from the homeowner. This purchase usually takes place at a later date, and the renter lives in the home until that time, while paying the owner monthly fees. Until it is paid for, the renter is considered to be leasing the property.

The price at which the home will be sold in a lease to own contract is typically set, between the home seller and the renter, at the start of the contract. The length, or term, of the contract is also detailed at this time. This presents a small amount of risk for both parties, however, because the real estate market fluctuates. For instance, if the market improves over the course of the contract, the renter could end up purchasing the home for a lower price than what it could be sold for. And, if the market collapses, the homeowner could potentially sell the home for a higher price than the market would dictate at the time.

During the course of the lease to own contract, the renter can make small payments towards the overall price of the property. At the start of the contract, the renter typically pays the homeowner a fee — usually between one and five percent — that can be placed against the price of the house, like a down payment. He may also make small monthly payments, in addition to rental payments, that will be deducted from the overall price of the home. These monthly payments are known as rent premiums, and they are not calculated with rent.

Should the renter decide at the end of, or at any time during, a lease to own contract that they no longer wish to purchase the home, they may end, or terminate, the agreement. In such a case, the homeowner typically keeps the fee that the renter paid at the start of the contract, as well as the rent premiums.

The price of the home and the amount of monthly rent are generally both determined by current market value. Real estate agents may help homeowners in determining what this is for a home, and may also aid them in finding renters who wish to participate in a lease to own contract. These prices, however, are usually negotiable between the homeowner and the renter.