What You Need to Know About a Rent-to-Own Land Contract
What is a Rent-to-Own Land Contract?
By definition, a rent-to-own land contract is a type of residential lease agreement. It’s an option period in which the tenant is given the right to buy the property and is credited a portion of their monthly rental payment toward the purchase price of the home. They will sign both a lease agreement and the land contract as part of the transaction. One caveat with a rent-to-own deal is that the tenant has the right to receive a deed to the property purchased (as they would in a land contract). If the tenant fails to perform according to the rental terms of the lease, the landlord can evict them and essentially "rent the home to someone else." This is why I tell people , if you intend to buy a property when the lease period is over, you need to have a separate purchase agreement as opposed to a rent-to-own land contract. Sometimes people who have poor credit can benefit from renting-to-own a home. The advantage for the tenant is they can accumulate money for a down payment while paying rent. The benefit for the landlord is they have a long-term lease with a potential buyer. The point of a land contract is to give the tenant a way to clean up their credit and then they will actually buy a house as opposed to continually paying rent for years and having nothing to show for it.
Legality of Rent-to-Own Agreements in Ohio
Ohio’s legal framework for the rent-to-own land contract is found in Ohio Revised Code sections 5321.01 to 5321.15.
Ohio Revised Code section 5321.01, paragraph A, provides that it is the purpose of Ohio Revised Code sections 5321.02 to 5321.15 to regulate the landlord-tenant relationship."
Ohio Revised Code section 5321.04 lists the responsibilities of a landlord. It provides:
(A) Consistent with the tenant’s right to quiet enjoyment as provided in sections 5321.03 and 5321.05 of the Revised Code, a landlord shall do all of the following:
- (1) Comply with all obligations primarily imposed on landlords by applicable building, housing, health, or fire codes;
- (2) Make all repairs and keep all common areas of the premises in a fit and habitable condition;
- (3) Keep all parts of the premises in a condition fit and habitable for human habitation;
Ohio Revised Code section 5321.05 lists the responsibilities of a tenant. It provides:
(A) A tenant shall do all of the following:
- (1) Pay rent to the landlord at the time and place agreed to by the tenant and the landlord. Failure to pay rent when due is noncompliance with the rental agreement and grounds for the landlord to terminate the rental agreement and bring an action for possession;
- (2) Keep all plumbing fixtures in the premises as clean as their condition permits and keep the premises and all common areas of the premises shared with other tenants in a safe and sanitary condition;
- (3) Use all electric, gas, and other heating sources, plumbing fixtures, and appliances in a safe, clean, and reasonable manner;
- (4) Not deface, destroy, damage, impair, or remove any part of the premises or knowingly permit any person to do so, except as permitted by law or authorized by the rental agreement, lease, or user agreement;
- (5) Conduct himself or herself and require other persons on the premises with his or her consent to conduct themselves in a manner that will not disturb his or her neighbor’s peaceful enjoyment of the premises;
Ohio Revised Code section 5321.06 deals with termination of tenancy. It provides:
Except as otherwise provided in sections 5321.17 to 5321.191 of the Revised Code and except for common ground and enclosing structure leases, a landlord or a tenant may terminate a lease or rental agreement in accordance with its terms and for a ground provided by law by providing written notice of termination at least thirty days prior to the rent due date specified in the rental agreement or lease.
Ohio Revised Code section 5321.09 lists the duties of a tenant. Paragraph C provides:
(C) The agreement required under division (B) of this section shall include all of the following statements:
- (1) "This rental agreement is governed by the rental law of the state of Ohio, Chapter 5321. of the Revised Code.";
- (2) "If you are the tenant under this rental agreement and you intend to rent the premises to a person who does not intend to live in the premises, you must sign the rental agreement as the tenant and also as the landlord of the premises.";
- (3) "If you are the tenant under this rental agreement and you intend to lease the premises to a person who does not intend to live in the premises, you must also provide written notice to the landlord identifying the place where the premises will be managed and the owner of the premises.";
- (4) "It is illegal to deny housing to anyone because of race, color, religion, sex, national origin, disability, or familial status. If you suspect you have been unlawfully denied housing because of race, color, religion, sex, national origin, disability, or familial status, you may file a complaint with the Ohio civil rights commission, local fair housing agency, or contact the United States department of housing and urban development."; and
- (5) "You have written rights under the law. This agreement may be voided if it violates Ohio’s rental law. The tenant and landlord should retain a copy of this rental agreement."
Pros and Cons of Rent-to-Own Land Contracts
Rent-to-own land contracts offer a number of advantages to buyers that may not be immediately obvious, especially to those using conventional purchasing methods. For example, many rent-to-own land contracts come with no down payment. Issues with credit won’t hold you back from being able to purchase your land through a lease with an option to buy. Flexible financing is perhaps one of the main attractions of this type of arrangement, as users can avoid huge down payments and high-interest loans. These deals are quite popular with people who have recently gone through a divorce, foreclosure or bankruptcy.
Under the right conditions, a lease-to-purchase can be a financial home run for everyone involved.
Risks to Consider
Despite the advantages, rent-to-own contracts in Ohio are not without their disadvantages. Given the long terms and often broad discretion afforded the renters, the risk of contractual disputes arises. Because these contracts are frequently drafted by sellers, however, the terms may not be readily apparent and can create unanticipated hurdles for the renter. Whether the contract will be enforceable in a court of law is also a concern. Certain contracts, such as those for gambling or extraordinary events like the lottery, are illegal and therefore unenforceable. Courts have held that contracts, such as leases or purchase agreements, found to be unconscionable (unfair in placement or timing) in nature may be void as against public policy. Even when valid, the course of future economic and property market events cannot be foreseen. A dramatic fall in market prices, for example, could leave buyers seriously "underwater" on their purchase price. Rapidly fluctuating income or unexpected expenses could leave buyers without the necessary funds to pay the rent or purchase price. Sudden or catastrophic changes to local infrastructure or loss of buyers’ of employment or good credit could pose additional challenges. Many potential problems can be prevented through careful planning, accurate drafting, and due diligence analysis leading up to the decision to enter into a rent-to-own contract, but the agreements inherently do involve some risk. Property owners should carefully evaluate whether these agreements make sense in their particular situation before entering into one.
Essential Components of a Rent-to-Own Agreement
When preparing a rent-to-own land contract, there are a few critical elements that must be included. First, the contract must include the payment terms and structure of the purchase. How much is the buyer to pay in total? How many installments? How much will each installment be, and when will they be due? What amount will the buyer owe if the seller ends the contract early? For the latter, there is a balance between protecting the buyer while not unfairly penalizing the seller too significantly. Many a seller has written an equity kicker into their contract, where if the buyer defaults, the seller may keep the cash payments so far as a fee for the breach, but they will demand the return of the house so long as the house retains value or appreciates.
The next critical concern is consideration. This is a legal term for something that is received. In the case of a rent-to-own, the initial consideration is the idea that the buyer would move into the property if they become the owner. However, it is common practice to charge an option fee or payment. The option fee is an upfront amount that is paid to the seller, with the expectation that the fee will later be credited toward the purchase price or the closing costs. Sometimes, however, this amount may not be credited. It is best to write into the contract what the seller will do with the option fee and when .
This leads to the question of how the rent payments will be treated. Rent payments are also considered consideration by the agreement. Additionally, the seller may choose to deduct from the rent payments for maintenance or repair costs, or the payments may accrue interest. A benefit of a rent-to-own is the ability to have the buyer put in work on the house, and then have that labor count toward the down payment at closing. That can pay for a significant portion of the closing costs and help a cash-poor buyer afford the home.
It is also important to outline what improvements the buyer can make during the rental period. Which party is responsible for paying property taxes? Who is responsible for homeowner’s association dues? Is the seller required to refund any part of the option fee or rental payments if the sale does not close? A rent-to-own agreement typically requires the buyer to pay for traditional responsibilities of homeowners, such as utilities and property taxes, similar to a rental agreement between a landlord and a tenant.
It is essential to define the obligations of both parties. In addition to the examples above, the contract should cover who is liable for unpaid expenses. How will these expenses be paid? Will the seller lien the property for unpaid amounts? For more information on rent-to-own agreements, contact a knowledgeable land use attorney.
Rent-to-Own Agreement Tips
Negotiating a fair and favorable rent-to-own land contract can be critical to the success of both property buyers and sellers. To help protect your interests and get the most out of your rent-to-own agreement, make sure to keep the following tips in mind.
First, always insist on a written agreement that clearly spells out the specific terms and conditions of your rent-to-own contract. While a verbal agreement may be easier and quicker to reach, it can leave both parties with more questions than answers down the road. Property rental agreements are usually simple, straightforward documents to draft, but they can be complex and a little confusing if you don’t have experience drafting these types of agreements. So to avoid misunderstandings and misperceptions, hire a qualified real estate attorney to draft and review your rent-to-own land contract.
Second, make sure to take the time to go over your rental agreement once it’s drafted, line-by-line, with your attorney, before signing anything. In addition to outlining the rent amount, security deposit and other particulars of your rental arrangement, your rent-to-own land contract should also specifically address options for terminating the lease or how to handle any defaults. If there are ambiguities in your rental agreement, make sure to ask your attorney to clarify the terms or make revisions before signing.
Third, if your rent-to-own agreement comes with an option clause that gives you the right to purchase the property at the end of the agreement, work out the details of that clause with your attorney. An option clause allows the buyer (tenant) to purchase the property before or upon expiration of the rental agreement. Property sellers typically receive an option payment in exchange for the seller (landlord) taking the house off the market during the term of the lease, and the buyer (tenant) gets to lock in the purchase price before the lease expires. Although most rental agreements contain language to protect the seller, it’s up to the buyer whether to exercise their option to purchase the property. For this reason, it’s very important to have an option clause that clearly defines your rights as a buyer (tenant) if you decide to go through with the purchase.
Finally, make sure your rent-to-own land contract contains a period during which you can evaluate whether your decision to buy the property is in your best interests. Twenty years ago, a three-month rent-to-own period was fairly standard. But some sellers now offer nine even up to 13 months. Hang onto that deposit, negotiate for a longer period and perform a full inspection in advance of any purchase.
Frequently Asked Questions
Here are a few questions a person may have when it comes to the "rent-to-own" concept in Ohio for a property. Generally, these contracts could be referred to as a "lease-option" or "lease-purchase" agreement. Regardless of the name, the concept and terms can be similar. While the following information will provide a general primer to the topic, a person should contact a qualified attorney to discuss the specific facts and legal implications of entering such an agreement.
Q: What are some things I should consider if I am entering into a lease-purchase agreement ("rent-to-own")?
A: You should know the following: (1) A lease-purchase contract is an option to buy the property, it is not a contract of sale. This is important because it gives you the ability to walk away from the transaction without having a typical liability that is found in a standard purchase contract. (2) Consider the term of the lease/purchase agreement. As the term gets longer, there are more legal ramifications that could arise given the change in the landlord/tenant relationship. Ohio Revised Code Section 5321 – duties of landlords and tenants. (3) It will be in your best interest to see the title commitment and preliminary title report for the property you are purchasing. This will give you an idea of any current liens on the property and what position a new lien would be in. (4) Understand that you likely will not receive any disclosures in the transaction (i.e. disclosure of lead paint for a home built prior to 1978 per federal law). Think carefully before entering into a property without a disclosure and type of inspection .
Q: What happens if I decide not to buy the property after I have made regular payments for some time?
A: This is where the rent-to-own concept can be better than some traditional purchase contracts. A lease-purchase agreement generally allows you to walk away from the agreement with little or no recourse. You lose the money you have spent on the property and any other forms of consideration, but you are not contractually liable to purchase the property, unless you have otherwise contracted to purchase the property. (i.e. In addition to the lease-purchase agreement, you have contracted to purchase the property in a traditional agreement that does not allow you to walk away from the property.)
Q: What happens if I do not make any regular payment?
A: This could become problematic. The lease-purchase agreement is a lease for real estate, which generally is a landlord-tenant relationship. This would mean that you would be subject to the same eviction process an apartment tenant would be if you spent several months not making a payment. A landlord can terminate your lease, sue for the amount owed, and have you evicted, all within a matter of one to four months of delinquency.
Q: Is there a special type of lease/purchase agreement in Ohio that is different than a traditional lease or purchase agreement?
A: There is no specialty document other than those that are created from scratch or from others. It is best to have an attorney draft a lease/purchase agreement that incorporates any specific timelines, provisions, contingencies, or additional material that you feel is necessary to fully protect your interests.