Rent to Own in Arizona
A Complete Guide to Understanding Rent-to-Own Contracts
The Four Types of Rent-to-Own Contracts
The rent-to-own process offers significant benefits to individuals who wish to buy a home but need time to establish credit or savings. The process often involves a private lender and negotiable terms of renting and selling.
To recap, there are four main types of rent-to-own programs available:
- Right to Purchase
- Option to Purchase
- Seller Carry
Each option in the rent-to-own process carries different requirements and rules. As such, the corresponding legal contracts contain key points that both a seller and buyer should be aware of. The guide below highlights some of the biggest differences in time, payments, and equity.
What is the difference between rent agreement and lease agreement?
As a potential home buyer, you may be wondering about where your rent or lease money is going throughout this process. Although the real estate jargon can be tricky, there are a few major differences between rent and lease agreements.
- Rent agreements are generally considered short-term or month-to-month and can automatically renew based on the landlord’s terms.
- Lease agreements involve a contract that stays in place for a longer period of time and sets the terms which bind a renter to the lease, a typical Arizona lease agreement is for a one year term..
Throughout your rent-to-own process, it’s important to be aware of minor differences in vocabulary. Ultimately, the terms you agree to can have an effect on the way the purchase contract is written at a later point.
How do rent-to-own contracts work?
Rent-to-own contracts are complicated and there are many ways to draft them to accomplish a variety of goals. The final language will depend heavily on the type of program that best fits your needs. No matter the situation or program this is a legal binding contract and should be drafted by an attorney or someone qualified and licensed to do so. In the State of Arizona this can all be done via a qualified and licensed Realtor.
Right to Purchase Contracts
Right to Purchase programs, such as those offered by Home Partners of America, offer an extended time of rent certainty leading to an eventual purchase. Buyers select a qualified home which is then purchased by the organization.
- Time period: Residents and potential buyers are required to sign a one-year lease in addition to signing the Right to Purchase agreement.
- Deposit required: Prospective buyers are required to provide an up-front security deposit at the time a lease is signed. This is held in escrow until the buying party closes on the home.
- Payments and monthly payment: Monthly payments are set during the lease agreement step.
- Home inspections: Before move-in, Home Partners conducts an inspection to outline required repairs and preferred renovations.
- Maintenance cost responsibility: When the lease is signed, the purchase price of the home includes a maintenance adjustment of $2,500. If maintenance costs during the lease period are less, the purchase amount is adjusted accordingly.
- Closing costs: When Home Partners closes on a home, closing costs are covered. These include relevant taxes, legal fees, title insurance, and other costs.
- Equity considerations: Until a tenant buys the home from Home Partners, they are simply a tenant with a landlord. Equity is transferred upon a complete and successful sale.
Option to Purchase Contracts
Option to purchase contracts solidify terms when a buyer has the exclusive right to purchase a property. The two parties agree to an established fee in exchange for guaranteed buying rights in the future.
- Time period: The length of these contracts vary, but some sources suggest that a period of 30-90 days is fairly typical.
- Deposit required: Yes, there is often a fee when a tenant or investor receives the option to purchase a property. This money acts as an earnest deposit of intent.
- Payments and monthly payment. While there are no recurring monthly payments, the option fee is required to make these types of contracts legal.
- Home inspections. Whether the option to purchase contract involves land or an actual residence, inspections may be included as terms of the contract. Involve an attorney to outline the specifics.
- Maintenance cost responsibility. During the contract term, there are usually no associated maintenance costs. These costs are usually minimal, particularly if an option to purchase involves a piece of land.
- Closing costs: Closing costs are incurred only when the contracted party agrees to buy from the seller or investor.
- Equity considerations: Until the property is transferred during a sale, any equity remains with the seller.
A Seller Carry contract takes place when the owner of a property provides personal, one-on-one financing. Since this option can appear risky, it’s important to use state-approved contracts to protect financial interests.
- Time period: In a seller carry contract, the time period is mutually agreed upon. This is a term outline in the promissory note.
- Deposit required: Any money devoted to a down payment is subtracted from the owed amount, as would be the case in a traditional loan.
- Payments and monthly payment: Although there is no banking institution involved, monthly mortgage payments are required in typical fashion and are paid directly to the seller. However, it is highly recommended for the parties to handle this transaction through a title company. The title company can collect and remit payments, and keep track of the ongoing liability as an unbiased third party administrator.
- Home inspections: Regular inspections are not required once ownership is transferred, but an initial home inspection can validate a property’s current condition and determine if there are any material defects that should be considered prior to contract ratification.
- Maintenance cost responsibility: Once a seller carry contract is signed, maintenance and upkeep is the new owner’s responsibility. If for any reason the home forecloses, the seller should be aware of how these costs could impact their financial situation.
- Closing costs: As with any home sale, closing costs cover relevant tax and title fees. Whether a buyer engages with a bank or seller as the lender of choice, these costs remain.
- Equity considerations: Seller Carry contracts may pose significant equity risks to both the seller and buyer if not followed carefully. It’s important to involve legal and financial counsel to protect equity on both sides. A licensed Arizona realtor or real estate attorney should be considered.
Lease-Purchase contracts are one of the most popular options in the world of rent-to-own deals. These contracts designate how, when, and for how much a home will be purchased, in addition to what fees and expenses will be paid and by whom, until the official closing occurs. The contracts are typically handled with two distinct documents; a purchase contract, and a pre-possession agreement.
Purchase Contract – describes all of the terms of the sale
- Time period: The timeframe for the lease is set from the beginning, with an agreed-upon end date for the lease (anywhere from 1-3 years). At that point, the buyer has the option of first refusal.
- Closing costs: A buyer must secure financing at the end of the lease-purchase agreement. Additionally, both buyer and seller may incur traditional closing costs.
- Down payment required: In a lease-purchase agreement, the final sale amount is often decided early. A portion of the monthly lease payments may go toward the final purchase price.
- Home inspections: As with any home sale and transfer of ownership, inspections are performed to uncover any safety or major issues prior to the sale. These are done prior to the new buyer moving into the home. Once the buyer takes possession, all repairs are considered the responsibility of the buyer.
- Equity considerations: Since lease-purchase agreements often include the use of option money, the benefits to a buyer’s equity can be greater. Again, the specific terms of the contract will define how much equity is built during the term of the lease.
- Payments and monthly payment: Normal pre-possession payments are made according to the contracted pre-possession agreement. These payments conclude when the buyer completes the sale. They cover the seller’s return on his investment, taxes, interest, and insurance. They are not applied to the buyers purchase price.
- Maintenance cost responsibility: Since the occupant is considered a buyer and not a tenant, all maintenance costs are the responsibility of the buyer.
- Taxes – The property tax is paid by the seller until the property is officially deeded to the buyer at close of escrow.
Do I Need to Work with an Agent?
If you’re considering entering into a rent-to-own contract of any kind, we recommend consulting with a licensed professional Realtor. Working with an agent who is well-versed in these agreements can save you thousands of dollars, and help ensure that you don’t fall victim to scams or improper practices.
Important Points to Consider
Now that you have a basic understanding of each contract, you may have questions about how this could influence future home ownership. Here are a few common questions and answers that many buyers want to know before deciding.
- Can a rent to own agreement be valid to get a mortgage? No, Your overall financial picture, credit score, debt, and ability to provide a down payment, will always affect the mortgage process.
- What are the pros and cons of a lease purchase agreement? A lease purchase agreement helps an unqualified buyer move into a home and begin building equity as though he was already the owner. It also may give a seller the ability to get a higher yield than simply renting the property. Since the negotiated sale price is typically higher than the market value at the time of the contract negotiation, a buyer can be in a difficult position if the property value doesn’t increase during the duration of the agreement.
- What are the pros and cons of a lease option agreement? A lease option agreement protects the tenant from having the home sold out from under him without the ability to buy it. It is essentially a right of first refusal.
- Are rent-to-own contracts hard to understand? While rent-to-own contracts are complex, that doesn’t mean they’re always hard to understand. Involving an experienced licensed Realtor that can answer questions and prevent confusion is critical.
- What laws regulate the practice? These agreements are regulated by typical contract law and vary from state to state. In Arizona, a licensed Realtor can negotiate and draft these agreements. In other states it must be done by an attorney.
Is a Rent-to-Own House Contract Right for You?
Purchasing a home is a major life decision, no matter how you decide to buy. Before you enter into a contract, turn to an experienced agency that you can trust.
At Century 21 Northwest Realty, we’re committed to helping you understand what should be included in a rent-to-own agreement. If you’re feeling confused by legal jargon or unsure how to find the perfect home for your family, don’t hesitate to reach out today.
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