The Contract

• A rent-to-own contract includes the standard features of a rental agreement plus terms under which the tenant is able to purchase the house. The purchase price of the house is specified in the contract along with a period during which the tenant may purchase the home -- the latter clause called the option period. Very often the tenant will pay a fee, generally not refundable, to the seller or landlord for right to buy the building.
  
  

Buyer Issues

• A buyer will want to make sure the option period in the contract is long enough for him to obtain a mortgage for the home. If you are a potential buyer, sit down with a mortgage broker or financial counselor before signing the rent-to-own contract to make sure you will be able to qualify for a loan before the option period expires. You will also want to verify the home price is at or below market value at the time the lease is signed and again at the point you plan to exercise the option. If the contract does not include a price for the house, but instead sets out a process by which the price will be set when you are prepared to buy, reconsider the deal. If the price isn't set until you are ready to buy, the option is relatively worthless -- you can go out and buy a house for the same price without having to pay an option fee.
  
  

Seller Issues

• Consider what might happen to housing prices during the option period. If they go up 10 percent, you will have lost out on the opportunity to sell for a higher price if the buyer exercises the option. If they go down 10 percent the tenant will walk away from the option. Rent-to-own contracts work best for seller's when they charge an option fee plus rent over market rate that, together, account for at least part of expected home appreciation.
  
  

Scams

• According to MSN Money, unscrupulous landlords prey on tenants they know will never qualify for a mortgage. They accept a non-refundable option fee and charge above-market rate rent under the guide of applying part of the rent to the nonrefundable down payment. The tenant can't qualify for a mortgage and isn't able to exercise the option, losing both the option fee and down payment.