You know that one great-uncle, who's out of sync enough with your family culture as to be almost completely irrelevant? For us, in the world of tenant-landlord law, Rent-To-Own contracts are like that.
We often say that Rent-To-Own contract are not covered under tenant-landlord law, but really, the "Rent" part often does fall under tenant-landlord law, even while the "to-Own" part doesn't. Wis. Stat. 704 explicitly says, "An agreement for transfer of possession of only personal property is not a lease" and ATCP 134 excludes a "contract of sale" from applying their administrative code.
However, we live to give here at the TRC, and we think folks should understand the components of Doing This Properly. So today, I'm attempting to explain what people typically mean when they say they "Rent-to-Own," how to do it well, and what to look for when the schnitzel hits the fan.
The Different Kinds of Contracts
These are all pretty different, and different laws apply. When people come in to talk to us about a "Rent-To-Own Contract," they might mean any one of these, with really different outcomes.
- Offer to Purchase: An offer to purchase, or contract of sale, is a straight-up real estate transaction. This is what would happen if someone found a property that he/she wished to buy on an MLS listing, or Zillow. That person would fill out a contract to offer to buy the property (like WB-11 through WB-15 on this site). That prospective buyer might or might not have a real estate agent, or ask for assistance from an attorney versed in real estate law. Traditionally, when people can't pay the full purchase price, they get a mortgage from a bank, and live in the unit while they pay off their loan from the bank. This kind of contract (the Loan Note and the Mortgage) is not regulated by tenant-landlord law, since it's about purchasing a property.
- Land Contract: This is an offer to purchase, as well. However, instead of involving a bank in a mortgage, the buyer acts as if the seller is loaning them the money, and the buyer gets the deed once the price of the property is paid in full. To do this, the buyer would fill out a land contract (there's a Wisconsin land contract here), go through the sales/closing process (making sure the place is livable, making sure all contingencies and contract terms are met, etc), and then the buyer would send regular payment to the seller. The buyer would have "equitable ownership" - they'd use and maintain the property (paying property taxes, paying for necessary repairs). If the buyer doesn't make payments like they're supposed to, the seller can foreclose on the buyer. This kind of contract is not regulated by tenant-landlord law, since it's about purchasing a property.
- Land Contract with Balloon Payment: This is the same thing as a land contract, but usually where the full amount of the purchase price is due on a certain date. This allows the buyer to put equity into the home (through regular payment to the seller), but then get a traditional mortgage around the time that the full amount is due. At the point where the mortgage from a bank is involved, the seller would no longer receive regular payment from the buyer, and everyone would be involved in a normal contract of sale. This kind of contract is not regulated by tenant-landlord law, since it's about purchasing a property.
- Option To Purchase: This is a contract that says the prospective buyer will have an option to buy the property. There's a form for this! This means that there is a negotiated contract of sale, but it will be activated in the future at the option of the buyer. It is the buyer's choice about whether to trigger the contract of sale, and is not an obligation (because then it wouldn't be an "option to purchase," it would be an "offer to purchase" or a "contract of sale"). Usually this "option to purchase" is one of the transition steps between a lease and some buying process, in a rent-to-own situation. This kind of contract is not regulated by tenant-landlord law, since it's about purchasing a property.* However, if a person is renting before triggering the option to purchase, that person is a tenant, and gets protections under tenant-landlord law.
- Lease, with extra payments towards purchase of property: Some circumstances which are called "rent-to-own" occur when there is a regular rental (a tenant, a landlord, a regular rent amount), with some extra amount of money paid beyond the rental costs. That extra money is the part where the tenant works towards ownership: usually a down payment, or regular payments to save for a down payment. This works best when it's clear what happens to that extra money, and when that relationship will go from tenant-landlord to buyer-seller. Usually, the rental contract component of this does qualify as a rental under tenant-landlord law (since it is not yet under a contract to purchase, but is instead currently a rental contract that will, at some clear point, become a contract to purchase).
Best Case Scenario Rent-To-Own Contracts
Most people want a rent-to-own contract because the traditional mortgage process isn't available to them (income is too low, no savings for a down payment, bad credit, etc). If you wanted to be thoughtful about a rent-to-own contract, you'd likely do it one of these two ways:
A. Land contract: Land contracts are clear. They are short. If you want to buy a home, and don't want to get a mortgage through a bank, this is a good way to do so.
B. Rent-to-Own Trifecta. A clear rent-to-own contract will have three parts:
- The Rental Agreement. An explanation of some different kinds of leases is here, and our Preparing to Rent page is here. Under Wis. Stat. 704.01, " 'Lease' means an agreement, whether oral or written, for transfer of possession of real property, or both real and personal property, for a definite period of time."
- The Option to Purchase Agreement. This explains how the contract of sale will be invoked by the buyer.* What makes your agreement go from a lease to a sale? What conditions will have to be met? Are there any extra money beyond the rental agreement that's being paid towards a future sale? What happens to that money if a sale doesn't go through? An example of this form is here.
- The Contract of Sale. This is an agreement that explains how the property will be purchased. It clearly states the purchase price, the defects on the property, and all the components of the property. An example of this kind of contract is form WB-11 on this site.
Protect yourself before you get into a rent-to-own contract:
Read Everything: don't sign anything with which you don't agree. If you need help understanding something, it is cheaper to hire a lawyer to explain it to you now, than to later on lose the house you've been buying.
- Treat the Process Like You Are Buying: because you are buying. This is a contract to purchase - once you're in it, it's very hard to get out.
- Know about the Problems: Get an inspector (most property purchases include an inspection contingency) to make sure that the property is in good shape, or at least as good as represented. Knowing about the problems means that you can work through them, or at a minimum, have enough information to decide whether or not to pursue this purchase.
- Everything is Negotiable: Everything in a contract is negotiable. It might not be possible to get to the other party to agree to the terms that you want, but often it is still worth asking. Tips on Negotiation are here. All offers can have counter-offers (see WB-44 on this page). Make sure that any repairs or defects in the property are handled (in writing) in a way that works for you, and don't sign anything with which you do not agree.
- Before you put any big money down make sure the Seller actually owns it: Before a buyer makes their payment to the seller in a standard purchase transaction, the buyer obtains a report from a Title Company confirming who owns the property and whether any liens are on the property. Before you, as the buyer, put down money and commit to buying, you too should get a Title Report from a Title Company. It’s a lot of money to commit when you buy a property, and you want to be confident the seller actually owns the property and has the legal right to transfer ownership to you.
When Things Go Wrong With Rent-To-Own:
- People somehow seem to think that rent-to-own is more informal than buying. But it is a buying process. Big problems occur when people sign without thinking, don't thoroughly inspect the property, and don't write down the terms of their agreement.
- When things aren't written down. What happens to the money you've built up? What happens if you fail to pay rent? What happens if someone makes a better offer on the property than the one you have? Verbal agreements are incredibly hard to prove, and in real estate, unlike landlord-tenant rental agreements, cannot be relied upon.
- When money isn't tracked. Make sure to keep track of all the money! If you've paid $10,000 in equity, but can't prove it, then you could be in trouble. If you received $10,000 in equity and don't know where it went, then you could be in trouble. Pay in checks if you can, and remember that not all money orders are easy to track (in fact, few are).
- When the seller dies mid-contract: We get more calls about a land contract in which the seller died, than any other rent-to-own question. Responsibility to adhere to the contract follows the estate of the person who died, but this works best when the buyer can prove what kind of contract they have.
- When the seller is foreclosed upon: Sometimes, even if a buyer is making regular payments, the seller might not pay their own mortgage, and the property is foreclosed upon (or at least, the foreclosure process starts). This can sometimes be avoided if the land contract is registered with the county (at the County Register of Deeds). If the foreclosure goes through, the buyer can pursue a fraud charge against the seller, but usually the most effective solution is when the buyer makes an argument during the seller's foreclosure hearing in the court, that the buyer continue to have rights to the property. (Here are ways to figure out if a property is in foreclosure).
Legal Remedies If Things Go Wrong:
If you have a rent-to-own contract of some kind, and it goes wrong, there's a number of ways that the courts might be called on to resolve the situation. How exactly it would work in each situation depends a lot upon the specific facts. However, here are some general ideas:
- Eviction: If the tenant is still a tenant, and not yet a buyer, they can be evicted for non-payment of rent, or otherwise not following the lease. More information about eviction is on our Eviction page.
- Fraud: A buyer in a rent-to-own contract has often made some kind of financial investment (perhaps making repairs on the home that would otherwise be the owner's responsibility, or perhaps making payments towards a down payment). If the buyer is removed or evicted, that person could sue the owner for fraud, if the owner knowingly allowed them to invest in the property, and did not follow the terms of the agreement.
- Unjust enrichment: A buyer in a rent-to-own contract could choose to sue the seller for unjust enrichment (a slightly less serious charge than fraud). This case explains some of what a court might look for in an unjust enrichment suit.
- Foreclosure on a rental: If the owner of a property is renting it to a tenant, and then the owner is foreclosed upon, the tenant has no rights to remain in the property. A blog post on foreclosure is here. Wis. Stat. 708.02 says that if a leased property is foreclosed upon, then the lease is subject to termination.
- Foreclosure on a sale, when the buyer is foreclosed upon: If the buyer fails to pay the bank (when the buyer has a mortgage agreement), or the seller (when the buyer has a land contract), the buyer can be foreclosed upon. This is generally a long process, where the buyer has a number of opportunities to get caught up (here's a roadmap of the steps). Eventually, if the buyer does not get caught up, the court will take away the buyer's rights to the property.
- Foreclosure on a sale, when the seller is foreclosed upon: Sometimes, especially in land contract situations, a seller might be foreclosed upon, while the buyer is making regular payments on a property. In this situation, usually the buyer's rights are terminated, and it can be devastating. That might be a moment in which the buyer would like to pursue a fraud charge against the seller, and can sometimes be avoided if the land contract is registered with the county (at the County Register of Deeds). The simplest solution in this situation is for the buyer to make arguments in the seller's foreclosure hearing, that the buyer should retain rights to the property.
Here are some helpful resources:
- Wisconsin State Law Library
- Department of Safety and Professional Services Real Estate Contractual Forms
- Chicago Title's Wisconsin Real Estate Forms
Hi! Did you know that we are not attorneys here at the TRC? And this isn't legal advice, either. And we aren't experts in real estate law, either, so if what we've written here doesn't sound right to you, talk about it with someone you trust. For help finding an attorney, check out our attorney referral list.
* This blog post was originally published on 2/15/16 and changed on 3/21/16 to clarify the nature of an "option to purchase." We hoped to make clearer that an "option to purchase" agreement gives the tenant/buyer the contractual right to purchase, but it is optional at the choice of the prospective buyer. The option to purchase form contains all the components of a contract of sale, but explains that it will become that locked-in contract of sale only once the buyer-to-be chooses to exercise that option.