How Does Rent-to-Own Work in Maryland for Sellers

When you need to sell a house in Maryland, offering a rent-to-own option can be a great selling method to attract those aiming for homeownership. It offers the flexibility of a lease agreement while usually netting more for your house than selling the traditional way.

Even in a seller’s market it can sometimes be difficult to sell your house in MD for the price you want or need. That’s where rent-to-own comes in. A rent-to-own agreement will often net you more money for your house than listing it with a real estate agent or selling “for sale by owner” in the Old Line State.

Let’s dive into the what selling property rent-to-own means and exactly how it works in Maryland.

So, What Does “Rent to Own” Mean? 

Selling a house “rent-to-own” in Maryland also sometimes referred to as “lease-to-own,” means you find a tenant-buyer willing to rent your home with the option or obligation to buy it after a set period of time. It’s kind of one of the few situations in life where you can have your cake and eat it too. 

There are two main rent-to-own agreement types or contracts you can make with your tenant-buyer. One is a Lease Option, the other being a Lease Purchase. We cover these two contract types in more detail later on. 

For now, let’s get into the process of selling a rent-to-own home in Maryland. 

Steps Required to Sell Houses Rent to Own in Maryland

1. Carefully draw up and review your contract

Rent to own contracts in Maryland are a lot like snowflakes, each one is unique. That’s one of the biggest draws for sellers using this method to sell a home. Each rent to own home contract is often tailored to the specific wants and needs of the seller and buyer of the property in MD.

This is where speaking with or hiring a professional real estate attorney to review your rental agreement can ensure your wants as a Maryland seller are protected when using this selling method.

As we mentioned earlier, there are two types of rent-to-own property agreements most commonly used in the state of Maryland: Lease Option and Lease Purchase.

The first part of both agreements involve the “Lease” part, which is typically the same in both options. The second part (the “Option and “Purchase”) is where you find the difference. Let’s go over these two options in a bit more detail.  

Lease Option Contract

A Lease Option contract is exactly what it sounds like. It gives your buyer the option to buy the home after renting it. 

The length of time for renting will vary from agreement to agreement. In Maryland, the rental period is typically anywhere from 1-5 years. After the agreed upon rental period in a lease option agreement your tenant buyer has the option to purchase the property. However, they are not obligated to buy the home.

The lease option buyer will usually be asked to put down a non-refundable option fee up front that they will loose if they do not exercise their right to buy the house at the end of the rental period. 

This can be beneficial to your buyer as it allows them to walk away from the property without additional penalty. This can really widen your pool of buyers, but more on these benefits later.

Lease Purchase Contract

The first step or part of the Lease Purchase agreement is the same as with the Lease Option. As the seller, you will be renting out your property for a certain, predetermined period of time, allowing the renter to potentially improve their credit score. However, the difference here is that after that rental period your buyer will be obligated to purchase the property from you.  

This means your buyer must be serious about purchasing the property from the jump. They will not be able to simply walk away from the property after renting it for 3-5 years. 

2. You and your buyer will have to agree on a price

There are two main options when determining the purchase price for homeowners choosing to sell rent-to-own in Maryland.

  • Determine the Purchase Price at the End of Rental Period: The other option is to determine the purchase price at a later date. This later date is typically after or near the end of the rental period. The value of the property has the chance to go up or down based on how the market moves. This means more risk for you as the seller and for the buyer as well.
    • This option is more often used in Lease Option agreements because they allow for more flexibility for the buyer. This method can also be used if you believe the market value of your home will rise significantly and do not want to sell below market value.
  • Set the Purchase Price Before Signing: One option is to determine the purchase price of the property at the time of signing. This means the price is known upfront and is not subject to change during the rental period. Setting the price this way gives the buyer and the seller peace of mind and stability. There is no more worrying about what the market may or may not do down the road.
    • This option is usually used in Lease Purchase agreements so both parties know what the sale price will be at the end of the rental period.

3. Collect the option fee from the buyer

In Maryland the buyer will typically pay the seller an option fee at the time of signing a lease-to-own agreement. The option fee is typically 1-5% of the purchase price of the property. This fee is usually applied towards the purchase of the home at the end of the rental period.

One really important part of this fee is that is almost always non-refundable. This is true even if the buyer decides not to purchase the property after the rental period. That is a major benefit to you as a seller and serves as compensation for your time and effort if the buyer is unable or unwilling to buy the home.

An option fee also gives you some peace of mind that your buyer is serious about purchasing the property and will take care of the property so they do not lose that money. It also gives your buyer more motivation to purchase the house and not walk away after the rental period. 

4. What to expect during the rental period

There are a few things to be aware of during the rental period of a rent-to-own home sale in Maryland.

You and buyer will need to agree on what percentage of the rent will be applied to the purchase price of the home. This percentage of the rent will gradually reduce the total amount of money needed from the buyer at the end of the rental term. Essentially, with this percentage the buyer will have been chipping away at the purchase price for 1-5 years while they have been renting. 

Another important thing to keep in mind, that many Maryland sellers overlook, is maintenance. You will have to know what maintenance and repairs you are responsible for the rental period and which ones will be the responsibility of the buyer. These responsibilities will be laid out and agreed to in the lease-to-own contract agreement. And they vary from deal to deal. 

Sometimes the seller will be responsible for all maintenance during the rental period. Another way to handle maintenance is to have it separated in tiers of cost. For example, all repairs more than $250 are paid for by the seller, anything less is paid by the buyer. This requires the homebuyer to fix things like a running toilet burnt out light bulbs while the seller will repair a major system like a refrigerator or heating system if they stop working.

5. The time has come to sell the property

When the rental period has ended, the selling process begins. The selling process is really just like any other sale of a property. The one main difference is that the buyer has been making “payments” for 3-5 years. 

The process is pretty standard and there shouldn’t be any surprises. Hopefully your buyer has been doing their homework and are ready to go. They should be prequalified for a mortgage and have their loans already sorted out. 

By the end of the process ownership of the property will pass on to the buyer similar to a regular home sale.

Benefits of Rent to Own in Maryland

The sellers have a few benefits when selling property rent-to-own in Maryland.

The biggest benefit is probably how much it opens your pool of buyers. Some home buyers struggle with getting a traditional mortgage. Others may struggle with the large upfront fees required to buy a home the traditional way.

Selling rent to own helps remove those barriers by giving these buyers time to work on their credit. It also allows them time to set aside money for payments and fees, improving their chances to qualify for a better home loan. 

A wider pool of buyers means there is a better chance of selling for a price that works for you and your needs. It gives you more options and options are usually a good thing. 

Depending on how your agreement is written it could allow you to sell your house for more than market value. If you determine the purchase price after signing the market has a chance to move in your favor. So you can lock in a buyer and still allow the house to increase in value. 

With rent to own agreements, the rent charged tends to be more than the average monthly rent for a comparable property. This is a plus to your cash flow but keep in mind that the additional money is to be applied to the purchase price of your home.

Another benefit is that unlike traditional renters, tenant-buyers are responsible for some general maintenance of the property. Leaving you with less landlord type responsibilities and no late night phone calls to clear a clogged toilet.

Potential Risks of Selling Rent to Own in MD

There are several risks and drawbacks to selling a house rent to own that need to be mentioned.

The worst drawback being that you could lose money. If you don’t lock in the price at signing and the market moves against you, you will take a hit. If you lock in the price and the market value of your home increases significantly, well, you’re out of luck there too. 

If you sign a Lease Option agreement the buyer/renter can decide to not purchase the property. If you were really looking to be done with the property that’s lost time and you have to start the entire process over again again. 

Repair Cost. In most agreements, you will be responsible for at least some portion of repairs, impacting the monthly rental costs. Not everybody wants the hassle of having to pay for repairs for a property they are not living in. It’s also just a constant worry or thought in the back of your mind of “what might happen.” 

Additionally, when selling with a lease purchase option, you may have to foreclose on the home or sue the tenant-buyer to recoup lost funds if they cannot or do not want to buy the home.

As with all rental properties, you also run the risk of the tenant-buyer trashing your home. While this is less likely when utilizing a rent-to-own option to sell a house vs renting to a traditional renter, it is still a possibility.

Maryland Rent-to-Own FAQs

How does renting to own differs from traditional renting and selling?

The selling part of rent-to-own is essentially the same as the traditional method. The difference really comes in with the renting or lease part. This renting period can last 1-5 years, typically 3-5 years in Maryland, and can be fine-tuned in many ways. The options are almost endless. Also, if you go the Lease Option route, you could end up just renting your house out for 1-5 years and not selling it at all. Though you will receive a non-refundable option fee to help cover your costs and time if the tenant-buyer falls through.

Is option fee applied to the purchase price? 

Short answer: yes. Usually an option fee is going to be applied to the purchase price of the property. But not always. If you don’t have the option fee apply to the purchase you may narrow your pool of buyers. 

What kind of seller is rent to own best for in Maryland? 

When you are selling a home in a buyer’s market: If you draw up your agreement the right way you could allow more time for the value of your property to go up. All while having a home buyer lined up and locked in. If you are looking to get experience in renting out properties: Rent to own can be a good way to gain some experience while having an end-date in place and higher cash flow.  

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