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I’m considering a rent-to-own contract. What should I look out for?
“Rent-to-own is a really good idea if your landlord is willing to negotiate something like that,” says Leisl Kerechek, a real estate attorney at the firm Wagner Berkow & Brandt. There are several reasons why rent-to-own can work, she says, but the primary benefit is that you may be able to negotiate a portion or all of your rent to be applied to a down payment. “Even if it is just a portion of it, those amounts quickly add up.”
Rent-to-own contracts can be negotiated on any type of property—condos, co-ops, or townhouses—and typically give you the option to buy the apartment at a certain price at the end of a two- or three-year lease. In the current climate, Kerechek says you may be nail down a price to your advantage.
“If you lock in a price now, even a generous price, the value may have increased by the time you buy, because the current health crisis will have passed. In addition, New York City is one of the premier cities of the world and there will always be demand,” she says.
Preparing the contract
“The attorneys for the buyer and seller will exchange riders and forms, and that costs money—it could be a few thousand dollars on either side,” she says.
You may not know whether you are going to exercise the option to buy, making you question whether to spend the money at the beginning of the lease. Even though there is an additional expense to preparing a contract as you begin your rental lease, Kerechek says having a purchase contract already negotiated with as many details outlined as possible can prevent disagreements down the road over the terms of the sale.
“An option is one party’s right to exercise their rights to lock in an agreement but you don’t want an agreement to agree, that’s unenforceable. You want to lock down as many of the details as you can,” Kerechek says.
“If your landlord is willing to give you an option to buy but isn’t ready to negotiate a contract, you should at least outline as many details as you can. Name the basics, including the parties, the name of the condo or co-op, the number of shares, the price, and you can even reference a standard form of contract rather than negotiating a full contract. You should also be clear how much of your rent will be applied towards a down payment,” Kerechek says.
The more detail you can lock down, the better it is for you. For example, if you’ll need to finance the purchase with a mortgage, that should be included so the seller agrees to it ahead of time, Kerechek says.
Generally with condos the board has a right of first refusal and with co-ops the board has the right to consent. Approval isn’t guaranteed so before entering a rent-to-own agreement on a co-op, it would be sensible to familiarize yourself with the building's requirements to make sure you'll be able to fulfill them at the point of purchase.
Keep timing in mind
Pay particular attention to the time and manner in which you are able to exercise the option to buy. You want to avoid any confusion and make sure you have the time you need to do due diligence on the property.
Rent-to-own gives you a chance to get the feel of a neighborhood and an apartment and see if you like it or not so that is an added advantage of the overall rent-to-own contract, Kerechek says. However, there should be an appropriate period of time prior to the expiration of the lease that allows you to go through the process of signing the contract, arranging the financing, and getting board approval.
“You probably want to make sure that the option to buy has to be exercised no less than 60 or 90 days prior to the expiration of the lease,” she says.
During your tenancy you may also want to receive any notices from the co-op or condo. This might include looking at the minutes, the inspection report, or looking at documentation like the offering plan and amendments, as well as financial statements.
“All these are typically included in the contract, and you may want to make sure you can see these prior to the exercise of the option to buy,” Kerechek says.
You might not have the option to buy if you are in default of your lease, Kerechek says. There may also be circumstances where the seller might try to get out of the sale on some technical terms so you want to make sure you know what conditions, if any, could restrict your option to purchase.
A rent-to-own lease might shift some of the repair obligations onto the tenant rather than the owner. As an example, Kerecheck asks, what happens if three weeks before you exercise the option to buy, the refrigerator and stove stop working? The tenant and landlord would likely make different choices about repairs or whether to install new appliances.
Kerecheck points out that often a rent-to-own agreement can result in a much friendlier relationship between a landlord and tenant. “Usually people try to cooperate when they have these kinds of deals in place,” she says.
Considerations for a seller
If you’re a landlord considering a rent-to-own arrangement, make sure that if you use a broker to find a tenant, you have an agreement about what their fees will be if a sale eventually occurs.
“You don't want to be paying double commission, so read your brokerage agreement carefully to see if renewal of the lease or sale of the apartment is covered by the brokerage fee,” Kerechek says.
New York City real estate attorney Leisl Kerechek joined Wagner Berkow & Brandt in 2017 and focuses on business and real estate law, co-op and condo law, and real estate and business litigation. To ask about a legal consultation, send an email or call 646-780-7272.