The Town Broker

Rent With Option To Buy In NJ? Here’s How.

Increasingly, I have clients that want to rent with an option to buy. In my part of NJ, some buyers are still very cautious about the housing market. For them, paying rent for a year and reserving the option to buy at a later date makes them feel more comfortable. And for some, it probably makes a lot of sense. But it needs to be done properly, and most people don’t really understand what has to be done. So let’s go over it.

Rent With An Option To Buy: How It Works In NJ

In order to rent and reserve the chance to buy the property in the future, it’s important to understand that you need to create two separate contracts. That’s right…TWO. The lease is one contract, and the option is the second contract. The option legally binds the owner to sell the property to the buyer at some point in the future, but it does NOT bind the buyer to the purchase. Hence the name “option”.

You should remember that a NJ real estate agent is only allowed to “fill in the blanks” on a pre-approved contract, we can’t draft our own. Otherwise, we’d be practicing law without a license which is a big no-no. And since an option is a type of contract? You guessed it! You’ll need an attorney to do draft it.

A few basic things need to go into the option contract:

1. When will the sale take place?
   • Usually, the date is set at the conclusion of the lease period. However, a different sale date can be negotiated.
2. What will the sale price be?
   • This MUST be established up front. You can agree to a specific dollar amount, or you can agree to accept the opinion of a licensed appraiser at the time the option is executed. But it won’t be legally binding without establishing SOME purchase price on the front end.
3. What will the terms of the sale be?
   • These would be the same as in any other purchase. How long does the buyer have to get a mortgage? Can they still live in the house during this period? Be sure to deal with an experienced real estate attorney who will know what to include here.
4. Will any portion of the rent count as money towards the purchase?
   • Unless you agree to pay rent in excess of the going market rate, I usually don’t see landlord/sellers agreeing to this. But under the right set of circumstances, they might.
5. What will you pay for the privilege?
   • And this is KEY. You can’t legally bind the seller to this contract of sale without paying something for the privileged. The buyer needs to pay the seller at the time the option is created. How much? Everything is negotiable. I typically see fees of about 5% – 10% of the overall purchase price. In some instances, I’ve seen them set for significantly less. This fee is usually credited towards the purchase price. But unless the buyer pays the seller a fee (known as consideration) UP FRONT, you don’t have a legally binding agreement.

OK…so you’ve established an option. The lease comes to it’s conclusion, and it’s time to decide. Do you want the place? If so, you exercise the agreement and buy it as per the terms established. But what happens if you don’t want to buy?

Well, you move on with your life. BUT THE SELLER KEEPS YOUR FEE. That’s correct…the 5% – 10% that you gave up front is kept by the seller. REMEMBER…what you bought for that fee was the RIGHT to purchase. And the seller was legally bound to make it happen. If you decide not to buy, that’s your decision. But you had the right…heck, you paid for the right. You simply decided not to do it.

It’s the last paragraph that often stops people from trying to rent with an option to buy. You really need to think this through. But for some, it IS the right thing to do. Just be sure that you’re working with an agent and attorney who has experience in putting these kind of deals together. If you do it incorrectly, you could end up disappointed. And as always, don’t hesitate to call me if you have any questions.

Tags: Option Contract, Rent-To-Own