what is the procedure for rent with option to buy property?

Asked by Lcsimpson, 90043 Thu Jul 2, 2009

Can you explain the process for the down payment going into an escrow account

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Glen Mitchell, Agent, Half Moon Bay, CA
Thu Jul 2, 2009
Freds post below is great! Face value of a rent to own option may sound attractive, but rarely have I seen one that makes any sense. Check in with a professional for sure. PS Have you spoken with any lenders on what you currently can afford? With rates as low as they are today it may make more sense to purchase now then wait until rates are higher. Review all your options...

2 votes
Dot Chance, Agent, Burbank, CA
Fri Jul 3, 2009
You can do this yourself but unless you have experience doing this you are much better off with a licensed agent. Realtors have access to all the standard forms for lease options. I have done them and there are pros and cons for lease w option to buy transactions.

At least one party usually feels like they got the short end of the stick at the end of the option period. This market is very unpredictable.

1) The parties agree to a monthly lease fee and whether or not any of that amount will be credited at closing toward the downpayment (not all lenders will allow rental credit)
2) The parties agree on a sales price
3) The parties agree on the length of the lease term
4) The parties agree on an amount of the option payment
5) All terms are worked out ahead of time...this is it in a nutshell and is not a complete guide

At the agreed upon time the buyer will either exercise his/her lease option or decide not to. If the market turns around and the value of the property is worth as much or more than the agreed upon price then the buyer is happy. I have seen a seller try to prevent the closing of a property because the value increased drastically within the option period. The seller had no grounds to back out and the buyer obtained an attorney to hold the seller's feet to the fire so to speak.

If the value of the property declines within the term of the lease option then the buyer can walk away and the seller can keep the option payment and is not required to extend the option.

I hope this helps!
Web Reference:  http://www.DotChance.com
1 vote
Ben Nicolas, Agent, Los Angeles, CA
Fri Jul 3, 2009
Freds answer below brings up some great questions you may not have considered I'm sure...

Unless you've done this before you should consider paying somebody that has experience to guide you through it. I'm sorry but that is honestly probably the quickest and cheapest way to do it right. You can try to do the research yourself based on answers to your questions on internet forums and slogging through different links on google but unless you plan on doing alot of these things you need to ask yourself this: Is the amount of time it takes me to educate myself to the level where I feel 100% confident in that I'm doing everything right worth more or less than the amount of what I'd pay to an experienced agent/escrow officer/attorney to help guide me through the process and make sure I'm using all the right documentation to minimize my liability and prevent me from negotiationg a deal that isn't in my best interest?

check out the link below, Wendy Patton is the biggest expert I've seen on lease options (I provided a link to her site below)

you can also try contacting Phllyis Rockower at 310-792-6404

M. Ben Nicolas
IET Real Estate
310 874-1278 cell
310 626-9690 fax
CA Lic# 01458128
1 vote
Dorene Slavi…, Agent, Torrance, CA
Fri Jul 3, 2009
Hi there Lc,
I have not been able to convince any lessors to consider lease option thusfar. It sounds attractive of course,but complicated to do practically. I'm sorry to be the bearer of bad news. If you haven't already considered it FHA only requires a 3.5% downpayment perhaps you would be able to save the down for something reasonable.
Best of Luck to you
Web Reference:  http://www.doreneslavitz.com
1 vote
Fred Griffin, , Tallahassee, FL
Thu Jul 2, 2009
You need a Real Estate Attorney
to draft the paperwork, and set up an escrow account.

Is it an OPTION to Buy, or is it a CONTRACT to Buy?


What amount of the Rent, if any, is applying toward a Down Payment?

Many Renter/Buyers assume that all of the rent is applying toward a down payment,
when in fact, none of it may apply.
It all depends on what is written in the Option Agreement, or Contract to Purchase.


If some of the money will apply to a Down Payment,
is it being held in escrow by a third party,
to keep the Seller from just running off with it?


Is there an existing Mortgage or Mortgages or Judgment Lien on the Property?

Have you done a Title Search or Abstract?

What is to prevent the Seller from taking out a Loan after the Fact and damaging the Title?
What happens if the Seller loses a lawsuit and a judgment lien is placed on the house?


How do you know that the Existing Mortgage or Mortgages are being paid?
If the house is Foreclosed on, you the Renter will have no rights,
and may be put out of the house (with a few excepted states, including California)


Is the Seller going to Finance this,
or will you be getting New Third Party Financing (Bank or Credit Union Loan)?


What about the Existing Mortgage - is there a Due on Sale Clause that might be triggered
by your agreement?

If the Present Mortgage Holder considers the Option to be a Transfer of Ownership,
it may trigger the Due on Sale Clause in the mortgage (the entire Loan Balance is accelerated and due immediately).

Likewise, if the Property Appraiser deems it to be a change of Ownership,
you may face Property Transfer Taxes or Intangible Taxes.


Who will insure the house? Do you need Tenant Insurance to cover your private property?

What if the house is severely damaged by a storm or fire - is there a provision for that?


Again, see a Real Estate Attorney.

There are serious consequences involved.

Best wishes,
1 vote
Shirley Smith, Agent, Bellflower, CA
Mon Jul 29, 2013
a real estate attorney is the only way to go. There are very few situations where rent to own works. Both renter and seller are usually overwhelmed by the details of the process.
0 votes
Yanni Raz, Mortgage Broker Or Lender, los angeles, CA
Sat Sep 29, 2012
The process should be negotiate with you and the landlord.
He can deduct the down payment from the rent or not, this is all negotiable.

This is a great idea these days :)
Web Reference:  http://homessell.com
0 votes
Kieran Jacks…, Agent, West Hollywood, CA
Tue Jun 5, 2012
Hello LCSimpson,

There are several takes on the rent with option to buy process for buying real estate. This is a very good method when the scenario is right, and the parties are educated to the process, and its done fairly.

The down payment going into an escrow is an excellent option. There's always a chance that the rent with option deal can go south, and fall apart. When this happens, there may be contractually agreed upon remedies that will directly involve the disbursement of that down payment money. It does not necessarily all go to the seller. So, by having this money in an escrow account, according to the contract, it will always be readily available when need be.

As opposed to the owner having it, and possibly NOT having it, when it is needed, according to the contract.

Hope this makes sense!

All the best,
Kieran Jackson, CA DRE # 01903647
Keller Williams Hollywood Hills
213.632.8484 Direct

Short Sale Specialist (SFR)
Web Reference:  http://KieranTheRealtor.com
0 votes
Jim Simms, Mortgage Broker Or Lender, Louisville, KY
Mon Apr 2, 2012
They are not as simple as the previous answers imply, they are very complicated when it comes time to exercise the purchase option so research the subject in depth before jumping in. They are probably not what you expect. Be careful putting up any large sum on a rent-to-own, most buyers and sellers are under the impression whatever deal they put together will be accepted by any lender when it comes time to actually purchase a home, not true. The mortgage underwriting guidelines are very specific and an underwriter may not agree with the terms on your original lease option. You may think all or part of the rent paid goes to down payment, not necessarily how it works when it comes time to close the deal.
I hope you don’t find a rent to own.

Every single person (tenant/buyer) I have spoken to that has done one of these in the last couple of years have lost money, one guy lost $50,000 another lady $25,000 and the list goes on and on. Do lots of research, the link below goes deep on the buyer's side. I hope it keeps you from getting hurt.
0 votes
Jessica Russ…, Agent, Beverly Hills, CA
Sun Apr 1, 2012
Lease Purchase sounds like what you are trying to figure out: The owner of the property should estimate his mortgage, taxes, fees, general repair and services such as utilities or gardening and agent comissions and add a few extra hundred dollars per month if not more as agreed with tenant/buyer. Also establish on contract a expiration date of when he will have to go through with his sales comittment. When this time expires, the owner can graciously extend with same or revised terms on a written extention or he will be intitled if in contract to keep all funds in escrow account. In this market, the buyer may have to extend due to financing issues or lack of credit. If you did mean a lease option, you would only prepare a lease agreement and add in terms (if not on a MLS sheet) for terms of a purchase including same expiration date.The only difference is there should be language or terms stating that the seller agrees to sell the property for a specific amount of monies or for an fair market value. The renter/buyer will have what is called first right for refusal. This right for refusal should state that he has the 1st right at expiration and comittment date to purchase property at termed price or current fair market value. If on MLS sheet there may be a supplimental sheet in which states terms of additional monies, deposits, or terms pertaining to the purchase comittment, not actual purchase. This will come later. The expiration date will come near and the owner should along with agent or lawyer, prepare purchase paperwork with down payment on the option.
0 votes
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