Leases with the option to buy and rent to own contracts are ways of buying a home without a mortgage. Land contracts are another way to buy a home without a mortgage. To learn more about them, read An Overview of Land Contracts.
While not having a mortgage may sound good, these contracts usually have fewer protections than a mortgage. These contracts usually involve private sellers, not a bank or other financial institution. Each contract should outline what the tenant-buyer and landlord-seller are supposed to do. They will also say what will happen if one party breaches (doesn’t follow) the contract. These contracts usually have less protections for buyers than mortgages.
Differences between Leases with the Option to Buy and Rent to Own Contracts
Leases with the option to buy and rent to own housing contracts are similar, but there are some key differences between the two. A lease with the option to buy is a contract with two parts. First, it is a residential lease. Second, the tenant purchases an “option” to buy the home, according to the terms of the option agreement. This purchase is usually non-refundable. In general, the option agreement will say all of the following:
The home price
The time the tenant can use (“exercise”) the option
Other requirements the tenant must meet before they can exercise the option
Under a rent to own agreement, a tenant pays a monthly fee. Most of it is rent; the rest goes towards the purchase of the home.
Risks to Think About Before Signing these Types of Contracts
A big risk for tenant-buyers is that if they breach any part of the lease, the landlord-seller could try to go through a regular eviction process. For a nonpayment of rent eviction, there is only a 10 day redemption period, and for termination of tenancy eviction, there is none.
Often an option to buy only becomes available after renting the home for a specific amount of time – usually several years. Also, the option can be forfeited (canceled) if the tenant does not meet a requirement of the contract. A common example of this is not paying rent on time.
Another major problem is that homes sold using these contracts often have significant repair problems. These contracts often make the tenant-buyer responsible for making all repairs to the home during the contract. This is the opposite of a regular landlord-tenant relationship where the landlord has to make all repairs.
Sometimes the landlord-seller doesn’t have clean title or any title to the home. Before a tenant-buyer signs one of these contracts, they should do a title search at their county’s Register of Deeds to make sure the seller has good title to the home. There could be existing liens on the property or other things that limit a buyer’s rights to the property. If the seller has clean title, the buyer may want to record their interest in the property at the Register of Deeds to make sure their interest is protected.
A tenant-buyer should be cautious with subordination agreements. These agreements allow the seller to give others interest in the property that is superior to buyer’s. If you have questions about these agreements, you should speak with a lawyer.If you have a low income, you may qualify for free legal services. Whether you have a low income or not, you can use the Guide to Legal Help to find lawyers in your area. If you are not able to get free legal services but can’t afford high legal fees, consider hiring a lawyer for part of your case instead of the whole thing. This is called limited scope representation. To learn more, read Limited Scope Representation (LSR): A More Affordable Way to Hire a Lawyer. To find a limited scope lawyer, follow this link to the State Bar of Michigan lawyer directory. This link lists lawyers who offer limited scope representation. You can narrow the results to lawyers in your area by typing in your county, city, or zip code at the top of the page. You can also narrow the results by topic by entering the kind of lawyer you need (divorce, estate, etc.) at the top of the page.
The success rate of these transactions for tenant-buyers is low. Landlord-sellers can choose what to call these transactions based on what is convenient for them. For example, they will call them “purchases” when there are repair issues, or they will call them “rentals” for evictions purposes. While tenant-buyers can do the same, they often do not have the same power or resources as landlord-sellers.
If a Tenant-Buyer Is Facing Eviction
There are unique defenses to eviction in option to buy and rent to own situations. For example, a tenant-buyer could argue that the arrangement is more like a land contract. This means the landlord-seller must file a land contract forfeiture complaint or judicial foreclosure complaint rather than a standard eviction complaint.
There are other defenses dealing with contract law, fair housing laws, consumer protection, and bankruptcy. All of these defenses are complex. If you are facing eviction and your lease has an option to buy, you may want to speak with a lawyer. Use the Guide to Legal Help to find lawyers or a legal services office in your area.