Posted by Randy (SD) on March 07, 2005 at 09:43:10:
Rent to Own or Lease Option as it is more commonly referred to is not illegal anywhere… even in New Jersey. There has been legal precedent set in some states that are extremely pro tenant and with some liberal judges when a L/0 has gone bad for the tenant.
The successful lease option contracts never make it to court. The issues usually arise when the lease and option contracts are all-inclusive (one document serves as the lease and contains the option to purchase) these contracts usually contain a substantial “option consideration” that is being forfeited by the tenant. In most cases the courts have concluded these contracts were in fact a deviation of a financing agreement and generally ruled in favor of the tenant.
So keep your lease contract and your option contract separate, make sure your tenant signs a full disclosure of the transaction, the “option consideration” should not exceed the customary security deposit and 2.5 x customary Rent (I’m not exact on the numbers but this is pretty close). So if you are leasing a property with an option to purchase, your lease payments are $1000 a month, your “allowable” option consideration should not exceed $3k-$4k.