The Rent-To-Own concept is getting a fair amount of play these days. At first, a rent to own situation sounds like a no brainer and in many cases it is a good idea. For example, a buyer might need a few months to raise some funds or a foreign buyer might need some time to establish credit in the U.S. But, unfortunately, as in many legal situations, the devil is in the details and most of the risks are on the seller. Here are some things to watch out for in structuring these deals:
1) A Few Months In Landlord-Tenant Court: The tenant/buyer might default in the payment of rent and not move out, leaving the landlord/seller in the regrettable position of having to go to landlord tenant court to evict the tenant/buyer. This can be quite time consuming (months not days) and costly (thousands not hundreds). Not a pretty situation;
2) Was The Option Properly Exercised?: In the commercial arena, there are numerous disputes over whether an option was properly exercised (i.e. was it sent to the right place, at the right time, with the correct information, etc., etc., etc.) and there is little reason to think these types of disputes won’t apply to the Rent-To-Own deals. The last thing a landlord/seller needs is to not be able to sell the apartment while the parties are in an extended litigation over whether the tenant/buyer properly exercised the option;
3) More Legal Fees: There are generally two contracts to draft and negotiate. One is for the lease and option and the other is the actual contract. The landlord/seller should consider forcing the tenant/buyer to pay these extras if he or she winds up not exercising the option;
4) Co-Op’s Need Not Apply: Rent-To-Own would probably not work in most co-ops which are quite restrictive with respect to subleases. This should be checked out before the co-op is marketed as a Rent-To-Own deal;
5) Damages To The Apartment Or Building: Not every tenant is resposible and some don’t pay the rent and/or damage the apartment or other units in the building. The security deposit may not be enough and both parties should have sufficient insurance for both property and liability;
6) House Rule Breakers: The tenant/buyer might wind up breaking house rules (think noise, smells etc.) causing the landlord/seller big problems with the building. Consider whether a tenant/buyer who breaks a house rule should also lose the right to buy the unit;
7) Recording Worries: When an option is recorded the public has notice that someone has an option. The tenant/buyer will want the option recorded to protect against another buyer stepping in but the landlord/seller may not since if the deal does not go through, the seller will have to explain away the option to the next buyer.
8) Loans, Loans, Loans: Many of these deals are structured so that a portion of the rent is applied toward the downpayment. The tenant/buyer will have to be sure to follow specific guidelines promulgated by Fannie Mae, Freddie Mac or the Federal Housing Administration governing rent to own situations, specifically as they relate to downpayments. For example, only the difference between market rent and actual rent paid may be credited toward the downpayment. The effect of the guidelines may make the economics of the rent to own arrangement difficult to balance with various guidelines.
So, if you are considering one of these deals, speak to an attorney first and make sure you have thought through the above and other issues BEFORE you sign on the dotted line.