What is a Rent to Own Agreement?
A Florida rent to own agreement involves a purchase price for the home being set at today’s values, allowing the tenant to lock in their price even if prices go up during the lease term. Rent credits are applied toward the down payment, not just disappearing to the landlord for renting the home. The lease contains an option to buy, so tenants have time to sort out their finances and obtain a mortgage. The sale usually occurs using the services of a closing agent, just like a normal sale. The seller may be willing to give up normal contingencies to allow the tenant to buy the home without things like loan approvals, appraisals, etc. since there is an element of commitment from both parties that the purchaser will use efforts to obtain the mortgage and the seller will sell. The rent to own agreement allows the tenant to gain home ownership, even if the tenant cannot obtain a mortgage immediately.
Each rent to own agreement is unique; it depends on the parties, the home, and the needs of the parties. For instance , the rent might be discounted if the tenant pays the costs for utilities. If the rent payments are not made, the tenant might lose their rights to buy the home. The parties need to make sure that their rent to own agreement includes specific terms like when is the rent due, where should it be delivered (if applicable), what happens if the rent payment is late, how much impact on the rent a utility charge might have, what happens if the tenant does not follow all applicable laws, and what happens if the landlord is unable to deliver possession to the tenant. A rent to own agreement might not allow the tenant to assign their rights under the agreement, but might allow them to sell their rights to another tenant, or sublet the home. It might include language that the tenant cannot be evicted for the payment of overdue rent due to intentional acts of the landlord. It might be helpful to include how the tenant will be informed of an eviction proceeding or landlord’s default of the rental obligation according to the lease.
Components of Florida Rent to Own Agreements
A Florida rent to own agreement generally contains several core components. The first element is typically a lease term. While the lease term can change, most leases last for one year. In some cases, there may be a negotiated extension period available after the one-year term has elapsed. Note that an association’s governing documents may contain restrictions on extensions of existing leases.
In addition to the length of the lease, a Florida "rent to own" lease will usually contain an option fee provision. The option fee, which is usually paid up front, is essentially a payment to the current owner that reflects the intention to purchase the home. The owner retains the right to allocate various amounts of the option fee to specific costs, which could include down payment funds. When properly utilized, an option fee can provide significant benefits to both the owner and the buyer.
The seller and buyer also negotiate the potential purchase price. There are numerous factors that impact the amount of the purchase price, including whether appraisals were performed, recent comparable sales, market conditions and terms for financing. The seller may establish (or offer) an option to purchase the home. Such an option is not required by law, but the existence of an option to purchase agreement may allow the buyer to lock in a purchase price. Consideration of these factors is critical to establishing the potential purchase price of the home.
Legal Qualifications of Florida Rent to Own Agreements
In Florida, rent to own agreements are subject to state-specific laws and regulations. These requirements include a written agreement, disclosures, and consultation with professional advisors.
Florida requires these types of contracts to be in writing, and mandates that certain disclosures be made to prospective tenants before the contract can be finalized. The contract must clearly explain the terms under which the parties can exercise the option, such as number of days’ notice for exercising the option and the manner in which payment of the exercise price can be made. The parties also have the ability to include other specifics in the written agreement, such as what, if any, repairs or updates will be required prior to purchase.
Florida rent to own laws require that the tenant prospectively disclose assets and income, and verify that he/she will provide a written statement on the status of these assets and income to the landlord prior to the option period.
Under current Florida law, both federal and state lenders, including those that offer mortgages and rentals, are subject to the same requirements as outlined above. This may seem like an easy way to ease into home ownership for consumers with bad credit, but Florida does not allow buyers without satisfactory credit to enter into rental purchase agreements with lenders. Even consumers with good credit must have a minimum score to be eligible for a lease to purchase option.
Pros and Cons
Before signing a rent to own agreement, it is always advisable that the tenant obtain experienced legal counsel who is familiar with these types of agreements. The following is a listing of advantages and disadvantages of entering into one.
One of the greatest advantages of a rent to own agreement is that the buyer has the option to purchase for a fixed price at some time in the future. For example, let’s say that the purchase price is determined to be $200,000.00. The tenant/tenant-buyer is renting for a "per month" fee, plus a "per month" small additional amount that goes into an escrow account which is used as an additional down payment at the time of the scheduled purchase. It is important to note that the period of time before the property is or must be purchased is not indefinite. Often times, there are contingencies and/or deadlines involved in the purchase such as a timeline by which the tenant/tenant-buyer must obtain financing. In addition, it is extremely important for the tenant/tenant-buyer to continue timely monthly rent payments and to keep the property in good repair, or risk losing their rights to purchase the property and/or their deposits.
Florida is one of the more landlord friendly states, where most properties have appreciated rapidly over the past decade or so. The tenant/tenant-buyer may, therefore, enter into a rent to own agreement in a rising real estate market where prices go up each month. If the parties agree to a top number and the tenant/tenant-buyer wants the property in the end, then a long term rental with a top rate of 5.5% may be conceivable. For example, let’s say this rent to own transaction begins with the square footage of the home valued at $100.00 psf and ends essentially 2 years later. Let’s assume that includes $20 psf improvements, for a total of $120 psf as the going in number. Then, let’s assume 5.5% increase factor over the 2 years. So $120 per sq. ft. at 5.5% is $127.33, therefore the purchase price is $153,150. If the tenant/tenant-buyer can’t get financing, they lose the property.
The property may be located in Florida, and just as importantly in a desirable neighborhood for the tenant/tenant buyer. For example, let’s assume that the square footage of the home is valued not at $100.00 psf, but rather $200.00 psf, because of its location – on the intercostal waterway of St. Petersburg, Florida. The tenant/tenant buyer wants this extremely nice waterfront property, and to her favor has an option to purchase the property at a fixed price of $400,000.00. That is $200.00 psf, equal to the current market price, and considerably lower than the going price in the area of $300.00 psf. It is important to remember that there are many variables the parties may agree upon; one of them simply being the price. If the tenant/tenant-buyer defaults on the rent payments and/or agreements, however, he loses the option to purchase and all rights to the property.
The rent to own agreement is extremely important in cases where the tenant/tenant-buyer simply cannot obtain financing for the purchase of the property at the time of entry into the lease agreement, but wants to try to purchase the property in the more distant future. However, it is always a good idea to have a skilled Florida attorney draft and/or review the rent to own agreement to ensure that you are adequately protected at all times.
Rising prices: One May End Up Paying More Than the Property Is Worth Dexterity: Be Aware That Tenants May Sue to Enforce Purchase, Therefore, Always Set An Exact Ending Date
Rent to Own Agreements in Florida: Steps
If you’re looking to buy property in Florida, one option is to enter into a rent to own agreement with the seller. A rent to own agreement allows you to essentially rent property for a set period of time with an option to purchase the property for a set price at the end of the rental period. A rent to own arrangement allows you to build equity while renting and avoid having to take out a mortgage loan. The first step to entering into a rent to own agreement is finding the property you want to acquire. This is easily accomplished using the services of a real estate agent who is familiar with the Florida real estate market. The next step is negotiating the terms of the agreement with the owner. You will have to decide on the rental payment and the purchase price at the end of the agreement. You will also have to decide on improvements , if any, that you want to make to the property. If you are making improvements to the property, you will need to negotiate who pays for the improvements. The final step is getting an attorney to draft the agreement. This is important for several reasons. First, an attorney will ensure your agreement is legally valid by including the terms required by Florida law and omitting the terms prohibited by Florida law. Second, an attorney will be able to review the effect the rent to own arrangement has on your taxes, so you don’t have any surprises later on during tax season. Finally, an attorney will be able to advise you about how your rent to own agreement will impact any property you might already own.
Common Mistakes and Avoiding Them
Even in a legal document as straightforward as a Florida Rent to Own Agreement, there are still many pitfalls that can attack your bank account. For example, while a security deposit is legal under a Rent to Own Agreement, Florida state law only allows a maximum amount for a security deposit equivalent to two months of the monthly rent. Do you really want to risk losing your security deposit when you could have been legally charging a larger amount? A good real estate attorney can help make sure your Florida Rent to Own Agreements are compliant with the law and have your best interest at heart.
Another area where you could find yourself in trouble is having the Rent to Own Agreement with the tenant as the primary document. Say you discover that the tenant has broken the Rent to Own Agreement but not your standard lease template. You will not be able to use the provisions in the Rent to Own Agreement to get the tenant out of your property based on the standard lease template. Having a real estate lawyer draw up both the Rent to Own Agreement and standard lease template can save you money by preventing you from having to go to court to remove a tenant who has violated the Rent to Own Agreement.
Should You Do Rent to Own? Final Thoughts
While a Florida rent to own agreement can be a great solution or offer a way to achieve homeownership that might otherwise not be possible, it might not be the best option for you. As outlined above, there are some potential limitations and risks to undertaking this type of arrangement. Your circumstances , long term goals, financial situation and eligibility to qualify for a mortgage when the time comes should all be considered when determining whether or not a rent to own agreement is right for you.