A lease-to-own house purchase (also "rent-to-own purchase" or "lease purchase") is a lease combined with an option to purchase the property within a specified period, usually 3 years or less, at an agreed-upon price. The borrower pays an option fee, 3% to 5% of the price, which is credited to the purchase price. The borrower pays rent, and an additional rent premium that is also credited to the purchase price. If the purchase option is not exercised, the buyer loses both the option fee and the rent premium.

To the Tenant/Buyer .. a couple of tips to protect yourself

As a tenant or a buyer, have you ever considered what may happen if the seller decamps with your money without transferring the property to you?

Fortunately there are some ways of ensuring that you get your money's worth. To start with, make sure that your option is recorded. In the event of the option being signed in the presence of a notary you reduce the opportunities for an unethical seller from pulling the carpet from under your feet which means, in simpler terms, that it lowers his chances of running away with your hard-earned cash. Be aware, though, that the Recorder's office is abreast of the notary law of the pertinent state. Remember that many a document has fallen through owing to a defective notary clause. Or, you might want to sign a ‘memorandum of option' affidavit in which case your - that is the optionee's - name does not have to figure. Yet it offers you protection in case the seller tries to sell your house during the option period.

You could also settle for an escrow agent to manage your option. The escrow agent can handle irritants like controversies regarding the deed on your behalf. They can make sure that the title deed of the concerned property is held by a reputed title company or attorney. Through the escrow agent you may now make payments and then collect the title deed.

It is also a good idea to record a mortgage using a promissory note. The latter is a legal contract between the optionee and seller. Through this contract you now enter a legal claim against the property; in other words, a lien holder. This means that you can now initiate a foreclosure should the seller refuse to sell. 

To the landlord .. a couple of tips to protect yourself

As a landlord or seller you need to be careful of defaulting buyers/tenants, in which case the tenant or buyer could cite an ‘equitable interest' in the mortgage. What is it that you must do in such cases? You might consider having two documents - one for the option and the second one for the lease agreement. Make sure the latter document contains no references to the former. You could also consider giving them the option of a year-long agreement with limited renewal rights.

In a court of law your documents should appear like a tenant-landlord agreement. You should refrain, at all costs therefore, from using words that reflect a buyer-seller relationship. Also, don't allow your tenant to pay taxes or insurance as this could be interpreted as a sale.

As a tenant who is looking to buy through the lease option, you can sublet the property and sell your option. That way, you can also qualify for capital gains. You can also negate losses on your property by leasing and converting it into rental property.

Before entering into an agreement with a seller, buyers should obtain the advice of a real estate lawyer. The above information is an overview and through experience and is not meant to be construed as legal advice.