Rent Coach

Rent Coach: What to know before renting-to-own a new condo

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Q. My wife and I were originally interested in buying a new condo, but we were not approved for a mortgage because of credit issues.  However, our lender thought that we could be approved in about a year if we resolve those issues. 

The developer offered to give us “an option to purchase” in our lease agreement and to apply 30% of the annual rent towards the purchase price.  Is there anything we should be concerned about in this deal?

A.  Having a rent-to-own option is a great way to familiarize yourself with a building before taking on the obligation of ownership.  Is the condo board full of crazy activists?  Does the cat lady next door make a good neighbor?  Does the firehouse down the street keep you up at night? 

There are, however, a number of issues you need to be aware of as well, so review the lease agreement and option with a real estate attorney before agreeing to sign it.  That being said, in general, an “option to purchase” will give you a legal right to purchase the apartment on the terms agreed to in advance.  The key to is make sure that you negotiate all of the terms in advance so that you’re not stuck with a “right” to purchase the apartment next year without having agreed to the specific details of the purchase. 

I would suggest that you and the developer negotiate and agree on a purchase agreement for the condo as well as the option to purchase.  Your option, should you exercise it, will give you the right to sign that particular contract, as opposed to negotiating additional terms next year.  Should you decide that you ready to buy next year, it’s generally preferable to know what the terms of the offer are and you likely have more leverage to negotiate up front than after you tell the developer that you’re prepared to buy the apartment you’ve been living in for twelve or more months.

Given your issues in geting a mortgage this year, make sure the purchase agreement includes a financing contingency. 

This year you will need to work diligently to improve your credit score so that you qualify for a loan on reasonable terms in twelve months.  Speak to your lender now and make sure you understand what steps you can take in the short term to raise your score.  Also, make sure you understand how, if at all, that credit equal to 30% of the annual rent will affect your financing.


Mike Akerly is a New York City real estate attorney, landlord, and real estate broker. He is also the publisher of the Greenwich Village blog VillageConfidential.  


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