The American Dream has always been to buy a house with a white picket fence and raise a family there until we grow old. In today’s world that is not always an option without a high credit score, years of work history, and a sizeable down payment.
Rent to own gives families who may not have enough money for a down payment the option to rent their house for some time until they are ready to buy it. On paper, that sounds amazing; so why are more people not utilizing this strategy?
The truth is, most people selling a home prefer to sell it and forget about it rather than hang onto it for a few years while someone pays on it slowly over time. While rent to own opportunities might be hard to find, if you stumble upon one, there are a few things you need to know.
How Does Rent to Own Work?
The way rent to own works is a landlord and tenant enter into an agreement, stating the landlord has agreed to sell their home to the tenant at a predetermined price at the end of a specific time frame. During this period there is usually a lease agreement, and a portion of the rent goes towards the purchase price of the house each month.
On the side of the tenant, they agree to rent this property for a predetermined amount of time before buying it when the lease expires. During this time they will have continued to pay rent as they usually would and most likely have reduced the final purchase price of the home.
The Different Rent to Own Contracts
With a rent to own situation, there are two different types of contracts you should educate yourself on. The first is a “Lease Agreement with Option to Purchase,” and the other is a “Lease Agreement with Purchase Agreement.” One rent to own contract is more complicated than the other and comes with a bunch of contingencies, so let’s take a more in-depth look.
Lease Agreement with Option to Purchase
This type of lease agreement is the more complicated one, and it requires the tenant to pay something called an option fee, which gives them the right to purchase the property at a later date. This provides the owner with an incentive to agree to the rent to own terms, and it also requires the tenant to have a stake in the deal if they decide to move out and abandon it.
If the landlord agrees to these terms and accepts the option fee, they are legally required to sell the tenant the house at the end of the lease. If the tenant decides they no longer want to purchase the property after agreeing to these terms, they forfeit the option fee.
Option fees are negotiable but usually range between 2-7 percent of the purchase price of the home.
Lease Agreement with Purchase Agreement
This is a much simpler contract where both parties agree on a purchase price for the home, or they agree to determine that at the end of the lease. Either way, the terms are set in writing at the opening of the rent to own agreement.
There is no option fee, and both parties are locked into the agreement right from the start. How the two parties decide on a fixed or future price is entirely dependent on the market. During a rising market, it would benefit the buyer to lock in their purchase price at that time, and the tables would turn during a seller’s market.
Why Choose Rent to Own?
There are a lot of bonuses for rent to own for both parties in the agreement. The benefits are clearly there for the buyer because they do not have to come up with a down payment, they have the chance to repair their credit, and they get to apply a portion of their rent to the purchase price of the home. They also get to do all of this while still having the perks of renting a house.
During a rent to own lease period, the landlord would still be responsible for maintenance and repairs of the home (in most cases). Of course, there are always exceptions to these rules, but this is also something that should be clearly discussed and agreed upon at the time you enter into a rent to own agreement with your landlord.
Rent to own might benefit a homeowner who is having a hard time selling their home during a tough market. These types of opportunities are appealing to many prospective homebuyers that have the dream of owning a home but don’t currently have the resources to do so.
The seller also benefits because any capital gains taxes are mostly deferred when the property is for investment purposes.
Tips for Renting to Own
You might have a lot of time to think about actually purchasing the home when you enter a rent to own agreement, but that doesn’t mean you shouldn’t take it seriously. It’s easy to get involved in something like this without the help of a professional, and you might get yourself into a bad deal because you didn’t have anyone on your side.
It’s a smart choice to have a real estate attorney look through the contract and help you understand your rights. They will also help you negotiate any terms that are not favorable in your direction.
Lastly, when you are renting to own a home, it might seem like a hassle to get an appraisal and inspection at the time of agreement because you are not buying the property at that time, but this is entirely necessary. When you enter into a Lease with Purchase Agreement, you are buying the house at that time because you are legally obligated to buy it at the end of your lease.
At that exact point, you need to make sure you are getting the house for the right price and that the property is structurally sound.
Homeownership is not as far out of reach as it may seem. While rent to own opportunities might be few and far in between, every town across the country is sure to have a few diamonds in the rough. Keep looking, ask questions, and make sure you do your homework.