What are the usual terms of a “rent with an option to buy” situation?
"Things I would specifically draw your attention to: the contract typically allows for an ""option"" to purchase; it does not typically compel purchase, although this is seen the purchase price is negotiated before anything gets signed the option to buy is typically available to the renter for the period of the lease contract (ie., if it's a 12 month contract the renter can opt to buy at any time in that 12 months) the amount of rent paid over time that will be applied to the purchase price is negotiated up-front before anything gets signed rent is paid at a slight premium (as Joe notes, if the rent should be $1000 per month, expect to pay $1200 per month) if the renter walks away they walk away empty handed; they do not get back the premium Having said all that - it's a contract negotiated between renter and seller and all of this is negotiable.  See also, ehow for a good overview." In most cases an rent with option to buy is structured as follows: The renter/buyer will place a deposit/premium (not the same as a security deposit) that purchases the option( the right ) to buy the home at a future date at a specific price. The renter / buyer will often pay extra rent in addition to market rent.  Many times this additional rent is contracted to be applied to the purchase price of the home. The risks to the renter/buyer are as follows: Also, something to note: Many people will recommend that you use the additional rents to be applied specifically towards the downpayment.  Be wary of this.  There are no institutional lenders available today that will allow the additional rent money to be applied towards your downpayment.  That means you must come up with the downpayment in cash before closing.  The additional rent payments can  be used towards the price.   Hope that helps.  Good luck! The typical deal would be a premium to the normal rent, say $1200 instead of $1000, in return he has the option to buy the house at a fixed price by the end of the agreement term. "While the other people have tried to answer your question as thoroughly as possible, I fear they are entirely incorrect in answering your question itself as it stands. The answer is that there are no usual terms. There are a handful of different options coming out now for this exact scheme. Examples include the UK Governments ""Help To Buy"" scheme. Accomodation is offered at a normal rate, and a small portion of the rent is set aside each month. At the end of a fixed period, that money becomes a deposit which the letter hands over to a mortgage provider who accepts it as a deposit. This might well be a terminology thing, since the other scenario which people described falls into the same name you've used. That scenario is where the investor who owns the property is considering sale of the property, and is happy to negotiate a price up front for the next year. Usually the rent and price is higher than the market rate because if the market goes well over the next year they could end up out of pocket. Putting that into perspective, over that year they are gaining their $1,000 a month or so, but having $100,000 invested means a return of 12%. If the property value is over $250,000 which I believe to be more likely, they are achieving a return of (I think) 4.8%. That's not a bad rate, by any means, but realistically they are losing a bit more for maintenance, and they could be making more from their money. If the market were to go up in that time by more than 4.8% (my house, for instance, increased in value by over 15% in the last 12 months), they are making a substantial loss since you are getting a house at 15% below the market rate. The total works out to a 10.2% loss for them. Note that I don't know the US housing market at all, I'm speaking mostly from my experience of the market here in the UK. This is what I hear, what I see, and what I've played. To summarise a bit: Make sure you check your terms before signing anything."
"There some specific circumstances when you would have a long-term gain. Option 1:  If you meet all of these conditions: Then you've got a long-term gain on the stock.  The premium on the option gets rolled into the capital gain on the stock and is not taxed separately.  From the IRS: If a call you write is exercised and you sell the underlying stock, increase your amount realized on the sale of the stock by the amount you received for the call when figuring your gain or loss. The gain or loss is long term or short term depending on your holding period of the stock. https://www.irs.gov/publications/p550/ch04.html#en_US_2015_publink100010630 Option 2: If you didn't hold the underlying and the exercise of the call that you wrote resulted in a short position, you might also be able to get to a long-term gain by buying the underlying while keeping your short position open and then ""crossing"" them to close both positions after one year. (In other words, don't ""buy to cover"" just ""buy"" so that your account shows both a long and a short position in the same security.  Your broker probably allows this, but if not you, could buy in a different account than the one with the short position.)  That would get you to this rule: As a general rule, you determine whether you have short-term or long-term capital gain or loss on a short sale by the amount of time you actually hold the property eventually delivered to the lender to close the short sale. https://www.irs.gov/publications/p550/ch04.html#en_US_2015_publink100010586 Option 1 is probably reasonably common.  Option 2, I would guess, is uncommon and likely not worthwhile. I do not think that the wash sale rules can help string along options from expiration to expiration though.  Option 1 has some elements of what you wrote in italics (I find that paragraph a bit confusing), but the wash sale does not help you out." "This answer assumes (based partly on your commants and some simplifying assumptions) As I see it you have a few options. Get a mortgage to buy your sister out. This avoids any ongoing involvement of your sister which may or may not be a good thing. It means you will be paying interest to a bank (or similar financial institution). Make an arrangement to buy the house in installments, possiblly in combination with some kind of rent. Likely to be a complex option to set up. Buy the house using a loan from your sister. potentially agree a ""private mortgage"" to protect your sister in the event you fail to pay. If interest is paid then it is likely to attract tax. Simply pay your sister rent, let her keep ownership of her half of the house either forever or until you have saved up the cash to buy her out. Rent is likely to attract tax. Whatever option you go with I would reccomend you get proffesional advice on any local legal/tax issues and drawing up the contracts. If you do go into an arrangement that keeps your sister involved make sure you discuss the what-ifs upfront and build them into your agreement. If you can't/won't pay what happens? can she insist that the house is sold and the proceeds split in some way? can she rent our her half of the house to someone else?" "What you charge them depends on what kind of use you want them to have of the house.  Your use of the term ""roommate"" implies you're imagining, well, a roommate-type situation where everyone has full access to all common areas.  This is the usual situation when multiple people jointly rent a house that none of them owns.  In this situation all the roommates are essentially equals. But if you own the house and are renting it out, you can do whatever you want.  A lot of people would not look for ""roommates"" but for ""lodgers"" or ""tenants"" --- you rent one room to a person, and you decide what the terms are for their use of the rest of the house.  That means you get to decide if/when they use the kitchen, if/when they get to use your dishes, what they can do in the back yard, etc.  In this situation the roommates are not your equals.  You own the property and you set the terms for everyone else.  (To clarify after reading the other answer: by ""not your equals"" I don't mean to imply that renters aren't equal as human beings to the landlord or should be treated as lowly peasants or anything like that.  I just mean that they need not have equal decision-making powers with regard to the housing itself.) I would say the big difference is the social dynamic: personally, I wouldn't feel comfortable renting out rooms to ""roommates"" unless I was quite sure I would get along with them --- basically, the kind of people I would actually rent with, not just rent to. If you do rent roommate-style, and everyone has essentially equal access to all the facilities of the house, I'd say it's reasonable to split all house expenses roughly equally (with perhaps some adjustments for differences in amenities, like if one person has a larger bedroom than others).  If you rent tenant-style, where you're not expecting them to be your buddies, the best way to determine a reasonable rent is to find other people renting similar rooms and see how much they're charging.  Craigslist is a great way to do that; you can also ask around to people you know." "To expand on what @fishinear and some others are saying:  The only way to look at it is that the parents have invested, because the parents get a % of the property in the end, rather than the original loan amount plus interest.  It is investment; it is not a loan of any kind.  One way to understand this is to imagine that after 20 years, the property triples in value (or halves in value).  The parents participate as if they had invested in 75% ownership of the property and the OP as if 25% ownership of the property. Note that with a loan, there is a (potentially changing) outstanding loan balance, that could be paid to end the loan (to pay off the loan), and there is an agreed upon an interest rate that is computed on the outstanding balance — none of those apply to this situation; further with a loan there is no % of the property: though the property may be used to secure the loan, that isn't ownership. Basically, since the situation bears none of the qualities of a loan, and yet does bear the qualities of investment, the parents have bought a % ownership of the property. The parents have invested in 75% of the real estate, and the OP is renting that 75% from them for: The total rent the OP is paying the parents for their 75% of the property is then (at least) $1012.50/mo,  A rental rate of $1012.50/mo for 75% of the property equates to a rental price of $1350/mo for the whole property. This arrangement is only fair to both parties when the fair-market rental value of the whole property is $1350/mo; it is unfair to the OP when the fair-market rental value of property is less, and unfair to the parents when the fair-market rental value of property is more.   Of course, the fair-market rental value of the property is variable over time, so the overall fairness would need to understand rental values over time. I feel like this isn't actually a loan if I can never build more equity in the condo. Am I missing something? No, it isn't a loan.  You and your parents are co-investing in real estate.  Further, you are renting their portion of the investment from them. For comparison, with a loan you have 100% ownership in the property from the start, so you, the owner, would see all the upside/downside as the property valuation changes over time whether the loan is paid off or not. The borrower owes the loan balance (and interest) not some % of the property.  A loan may be secured by the property (using a lien) but that is quite different from ownership.  Typically, a loan has a payment schedule setup to reduce the loan balance (steadily) over time so that you eventually pay it off.  With a loan you gain equity % — the amount you own outright, free & clear — in two ways, (1) by gradually paying off the loan over time so the unencumbered portion of the property grows, and (2) if the valuation of the property increases over time that gain in equity % is yours (not the lenders).  However note that the legal ownership is all 100% yours from the start. Are my parents ripping me off with this deal that doesn't allow me to build my equity in my home? You can evaluate whether you are being ripped off by comparing the $1350/mo rate to the potential rental rate for the property over time (which will be a range or curve, and there are real estate websites (like zillow.com or redfin.com, others) to help estimate what fair-market rent might be). Are there similar deals like this...?  A straight-forward loan would have the borrower with 100% legal ownership from the start, just that the property secures the loan.  Whereas with co-investment there is a division of ownership % that is fixed from the start.   It is unusual to have both investment and loan at the same time where they are setup for gradual change between them.  (Investment and loan can certainly be done together but would usually be done as completely separate contracts, one loan, one investment with no adjustment between the two over time.) To do both investment and loan would be unusual but certainly be possible, I would imagine; however that is not the case here as being described.  I am not familiar with contracts that do both so as to take over the equity/ownership/investment over time while also reducing loan balance.  Perhaps some forms of rent-to-own work that way, something to look into — still, usually rent-to-own means that until the renter owns it 100%, the landlord owns 100%, rather than a gradual % transfer over time (gradual transfer would imply co-ownership for a long time, something that most landlords would be reluctant to do).   Transfer of any particular % of real estate ownership typically requires filing documents with the county and may incur fees.  I am not aware of counties that allow gradual % transfer with one single filing.  Still, the courts may honor a contract that does such gradual transfer outside of county filings. If so, what should I do? Explain the situation to your parents, and, in particular, however far out of balance the rental rate may be.  Decide for yourself if you want to rent vs. buy, and where (that property or some other).  If your parents are fair people, they should be open to negotiation.  If not, you might need a lawyer.   I suspect that a lawyer would be able to find several issues with which to challenge the contract. The other terms are important as well, namely gross vs. net proceeds (as others point out) because selling a property costs a % to real estate agents and possibly some taxes as well. And as the others have pointed out, if the property ultimately looses value, that could be factored in as well. It is immaterial to judging the fairness of this particular situation whether getting a bank loan would be preferable to renting 75% from the parents.  Further, loan interest rates don't factor into the fairness of this rental situation (but of course interest rates do factor into identifying the better of various methods of investment and methods of securing a place to live, e.g. rent vs. buy). Contributed by @Scott: If your parents view this as an investment arrangement as described, then you need to clarify with them if the payments being made to them are considered a ""buy out"" of their share. This would allow you to gain the equity you seek from the arrangement. @Scott: Terms would have to be (or have been) declared to that effect; this would involve specifying some schedule and/or rates.  It would have to be negotiated; this it is not something that could go assumed or unstated.  -- Erik" The Motley Fool suggested a good rule of thumb in one of their articles that may be able to help you determine if the market is overheating. Determine the entire cost of rent for a piece of property. So if rent is $300/month, total cost over a year is $3600. Compare that to the cost of buying a similar piece of property by dividing the property price by the rent per year. So if a similar property is $90,000, the ratio would be $90,000/$3600 = 25. If the ratio is < 20, you should consider buying a place. If its > 20, there's a good chance that the market is overheated.  This method is clearly not foolproof, but it helps quantify the irrationality of some individuals who think that buying a place is always better than renting.  P.S. if anyone can find this article for me I'd greatly appreciate it, I've tried to use my google-fu with googling terms with site:fool.com but haven't found the article I remember. Are things getting better yet or are things still a mess? I have heard people say that right now is a 'good' time to take out a   loan, and that it is a buyer's market in real estate. Something to consider here is what intentions do you have for the real estate you'd buy.  If you intend to sell quickly, then selling into a buyer's market doesn't sound like a great idea.  While real estate may be cheap, there can be the question of how long do you think this will last?  How much of a burden on time and energy are you expecting to take if you do switch residences or buy an investment property? But more specifically, are there any hidden details that come with   taking a loan out when interest rates are low that I should be aware   of? I'd be careful to note if the rate is fixed for the entire length of the loan or does it adjust over time.  If it can adjust then there is the possibility of those adjustments going up. "I would strongly try to influence circumstances so that buying is feasible. That means: Buy something where it is likely that you can resell it at the same price or even higher - or, at the least for significantly more than ""total cost of ownership - rent payed elsewhere"". For example, if it is in an area where you have good reasons to assume that prices will go up in the future. Or if the object needs refurbishing and you are sure that you can do it yourself. You will, no doubt, sell it later. You will near certainly not live in such a small house for all time. So the question of ""whether"" you will sell it is moot. So, when you have a potential house to buy, you will have to calculate everything very carefully, with an estimate of how long you will stay. You need to make your calculation as optimistic/pessimistic as you like (this is more a question of your character). Whatever calculation comes out better, wins. It goes without saying that if you miscalculate (for example, overestimating your ability or time to refurbish; forgetting to calculate non-obvious costs of refurbishing; being surprised by hidden damage to the object; misjudging the price development in the area) you run a considerable risk. So, the question of whether you are able to calculate the risks correctly will need to influence the calculation itself (add 20% or whatever risk buffer if you are not sure, etc.). But the potential is for you to have a very good start in the whole financial game of your life. Your house will likely be for a considerable time the biggest single part of costs in your life, and getting that under control from the get-go is a huge benefit." "I'm a little confused on the use of the property today.  Is this place going to be a personal residence for you for now and become a rental later (after the mortgage is paid off)?  It does make a difference. If you can buy the house and a 100% LTV loan would cost less than 125% of comparable rent ... then buy the house, put as little of your own cash into it as possible and stretch the terms as long as possible.  Scott W is correct on a number of counts.  The ""cost"" of the mortgage is the after tax cost of the payments and when that money is put to work in a well-managed portfolio, it should do better over the long haul.  Don't try for big gains because doing so adds to the risk that you'll end up worse off. If you borrow money at an after-tax cost of 4% and make 6% after taxes ... you end up ahead and build wealth. A vast majority of the wealthiest people use this arbitrage to continue to build wealth.  They have plenty of money to pay off mortgages, but choose not to.  $200,000 at 2% is an extra $4000 per year.  Compounded at a 7% rate ... it adds up to $180k after 20 years ... not exactly chump change. Money in an investment account is accessible when you need it.  Money in home equity is not, has a zero rate of return (before inflation) and is not accessible except through another loan at the bank's whim.  If you lose your job and your home is close to paid off but isn't yet, you could have a serious liquidity issue. NOW ... if a 100% mortgage would cost MORE than 125% of comparable rent, then there should be no deal.  You are looking at a crappy investment.  It is cheaper and better just to rent.  I don't care if prices are going up right now.  Prices move around.  Just because Canada hasn't seen the value drops like in the US so far doesn't mean it can't happen in the future.  If comparable rents don't validate the price with a good margin for profit for an investor, then prices are frothy and cannot be trusted and you should lower your monthly costs by renting rather than buying.  That $350 per month you could save in ""rent"" adds up just as much as the $4000 per year in arbitrage. For rentals, you should only pull the trigger when you can do the purchase without leverage and STILL get a 10% CAP rate or higher (rate of return after taxes, insurance and other fixed costs).  That way if the rental rates drop (and again that is quite possible), you would lose some of your profit but not all of it.  If you leverage the property, there is a high probability that you could wind up losing money as rents fall and you have to cover the mortgage out of nonexistent cash flow. I know somebody is going to say, ""But John, 10% CAP on rental real estate?  That's just not possible around here.""  That may be the case.  It IS possible somewhere.  I have clients buying property in Arizona, New Mexico, Alberta, Michigan and even California who are finding 10% CAP rate properties.  They do exist.  They just aren't everywhere. If you want to add leverage to the rental picture to improve the return, then do so understanding the risks.  He who lives by the leverage sword, dies by the leverage sword.  Down here in the US, the real estate market is littered with corpses of people who thought they could handle that leverage sword.  It is a gory, ugly mess."