If you have a tenant that wants to buy your rental property, is it a good idea to offer them a rent-to-own or lease purchase option?
In many cases, it is better to simply sell the property to the tenant. Although you can net a financial premium by providing an option to purchase, you face certain risks like incremental payments, loss of buying interest, and shifting market conditions.
Here’s what you need to know about rent-to-own agreements from our experienced team of real estate attorneys at Diamond Real Estate Law in McHenry, Illinois.
Should I Sell My Rental with a Rent-to-Own Arrangement?
If you are having difficulty finding a buyer for your property, you may be able to entice a buyer by offering a rent-to-own arrangement. Not only does the tenant get to fall in love with the home, but you also get the added financial windfall of a lump sum or monthly option to purchase payment.
Rent-to-own agreements are also ideal for owners who want to sell but lack revenue. A monthly rent can cover any expenses that may pop up.
However, you should keep in mind that a rent-to-own contract prevents you from withdrawing your offer. Although the tenant can choose not to buy, you are obliged to sell if they meet the terms of the agreement; you cannot withdraw the offer if you get a better offer, so make sure you want to sell.
Reach out to our Diamond Real Estate Law team if you have any questions about whether an Illinois rent-to-own agreement is right for you.
The Two Most Common Kinds of Rent-to-Own Agreements
In Northeastern Illinois, rent to own agreements generally take one of two formats.
- One form of agreement is called a purchase option or option contract. In this deal, the tenant pays additional money, besides their usual rent, for the option to purchase the property at a set price for a set period of time.
An example of this would be a tenant who pays their landlord $5,000 for the exclusive right to purchase the property for $150,000 any time during 2022. If, for any reason, the tenant does not complete the purchase within 2022, the landlord keeps the $5,000. In these types of deals the tenant sometimes makes an additional option payment every month.
With this type of arrangement, it is very important that the agreement be in writing and be very clear as to what is the rent payment and what is the option payment.
- The second type of deal is commonly referred to as articles of agreement for deed. In this type of deal, the buyer makes an initial down payment, and the seller signs a deed, which is held in escrow until the buyer pays the full purchase price. The concept behind this arrangement is that a seller is temporarily financing the buyer’s purchase.
In this type of agreement, if the tenant doesn’t complete the purchase and stops paying their rent, the landlord will probably have to do a foreclosure case instead of a simple eviction case. A foreclosure case is a lot more expensive and time-consuming than a simple eviction case for non-payment of rent.
These types of agreements can also cloud the title of the property and make it challenging for the landlord to sell the property to a different person without a written agreement with the tenant or a court order.
At the end of the day, it is very important to be cautious when drafting rent-to-own or lease purchase options. Is always best to contact a local real estate attorney to understand your rights and responsibilities and to make sure you’re properly protected.
Diamond Real Estate Law is here to help
Headed by Adam Diamond, our firm is proud to help support sellers and buyers across the northeastern Illinois real estate market. If you need answers about sales, tenancy or estate planning, Diamond Real Estate Law is here for you. Contact us today to get started.
DISCLAIMER: Any information contained herein is solely for informational purposes. While it is important that you educate yourself, nothing herein should be construed as legal advice or create an attorney-client relationship. For specific questions, we urge you to contact a local attorney for advice pertaining to your specific legal needs.
