If you’re looking at homes you may find work come across a “rent to own” home or as a seller you might be interested in this type of option but are not sure how it works or how to go about buying or selling your home in this fashion.
Rent to own homes are properties in which a buyer is permitted to rent a home for a specified amount of time with the option of purchasing that home during that timeframe. The price, along with the contract is also settled before the rental lease begins. If the buyer chooses not to buy the property, the property and any rent credits collected will go back to the seller. Unfortunately, the seller will then need to consider trying to resell the home to someone else.
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These situations were great for buyers that may not be ready financially to take on a mortgage or that are rebuilding their credit and cannot qualify for a mortgage just yet. These also work well when the housing market isn’t performing as well as it should be. Many sellers will turn toward the rent to own option. This is a unique offering from the seller if the buyer is hard-pressed to find a home elsewhere or even a mortgage. If the seller doesn’t need to actually get rid of the home, they really don’t have a lot to lose at this point. If the buyer decides that they are not interested in buying the home at the end of the leasing. The seller will get the home back and will have received all of the monthly rental payments that the buyer had been making.
Depending on the housing market and the demand, most rental payments will cover housing expenses such as a mortgage, property taxes, insurance and maintenance. If the buyer decides to purchase the home, all of the rental payments made thus far will go towards the down payment or purchase of the home itself. The seller can either keep these funds in a separate account rolling them over to the buyer or deduct the rental payments from the cost of the home at this point.
Here are some important factors to consider when choosing a rent to own property.
There has to be an original agreement on the purchase price. Both the buyer and seller need to come up with a final price that they both agree upon. The terms are final and usually cannot be changed once the lease begins.
This option also eliminates the option for other buyers. The rent to own buyer will pay an “option fee”, which is negotiable and gives the buyer the option to purchase the home at a later time. This fee also prevents the seller from renting the home or selling the property to anyone else.
Once the final price is agreed upon and fees are paid, it is at this time that the tenant occupies the home. Generally, rent to own homes have terms of about three years, which gives the buyer a substantial amount of time to get their financing in order and fulfill the terms of the agreement.
Each month, the buyer will pay the rent, which goes toward a credit to be applied towards the purchase price of the home. If the buyer decides not to sell, that credit will stay with the seller and not be returned to the buyer. If the buyer does not follow through, the stand to lose thousands of dollars by not making the purchase but, this is not necessarily a bad thing. Situations change, things come up and perhaps this is not where the buyer actually wants to live permanently. This is really no different than making a rental payment each month except that the seller will now need to either reprint the home or put the home back on the market.
There are a lot of benefits for both the buyer and the seller in a rent to own option. The buyer’s credit will often be less of a deciding factor when qualifying for the purchase and their down payment may be smaller depending on what the seller will agree to. Sellers can also benefit because they are earning monthly cash if they don’t need to sell the home right away. Another perk for the seller is not the buyer will likely take better care of the home knowing that they may eventually own it themselves.
There are three parts to a rent to own agreement: the rental agreement, which outlines the terms associated with the tendency, the option agreement, which identifies the period by which the buyer has time to consider purchasing the home, and the sale contract, which identifies the term of sale and purchase price.
If you’re considering a rent to own option it’s also a good idea to speak to a real estate broker or agent that specializes in not only buying and selling real estate the property management as well. We can help you facilitate the transaction, talk about the pros and cons for your situation and help you execute the terms for a rent to own option. – More: A Real Estate Agent who is also a property manager