Guide To Rent To Own Homes

THE ONLY GUIDE YOU WILL EVER NEED TO UNDERSTAND “Rent To Own Homes”

As a homebuyer, a mortgage is typically required to purchase a home. Your credit needs to be good in order to qualify for most loan programs, and a cash-down payment may also be required. If you don’t have all that, you might not want to take the typical route to homeownership.

However, there’s an alternative; rent to own homes which allow you to lease a home, and have an option to purchase it before the end of the lease. The arrangement typically had two parts: a regular lease agreement and an option to buy. These types of arrangements are beneficial to both buyers and sellers, but there are some risks involved you should also know of.

You can also use these types of agreements for rent-to-own mobile homes and rent-to-own trailers. This article will cover how rent-to-own works, the pros, and cons, plus the factors to consider by buyers and sellers.

WHAT IS RENT TO OWN?

Rent-to-own homes are an alternative when you don’t want to take traditional home loans. At the outset, these types of arrangements are like the traditional leases that landlords and tenants might sign.

However, as a renter, the contract can also give you exclusive rights to purchase the home at some point in the future. Part of the upfront money, and the established monthly rent, is also used towards the purchase price.

Such arrangements are sometimes used as part of housing programs designed to revitalize neighborhoods or establish affordable housing. Any two parties are allowed to enter into such an arrangement. 

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HOW DOES A RENT TO OWN HOUSE ARRANGEMENT WORK?

The rent-to-own house arrangements usually start with an agreement between the buyer and the seller. The seller permits the buyer to rent the home, mobile home, or trailer for an agreed-upon period.

After the period ends, the buyer can buy the property according to the terms of the agreement. The buyer pays an extra premium, in addition to the agreed-upon rental payment, after entering into a rent to own agreement.

The premium paid goes toward the down payment on the buying of the home. The payment is not refundable. It’s important for a renter to be reasonably sure they’ll buy the property after the leasing period is over.

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UPFRONT FEES (NON-REFUNDABLE)

The buyer pays an upfront fee, usually non-refundable. The fee is known as option money, option consideration, or an option fee. The fee provides the buyer the exclusive rights option to purchase the house you want by a particular date.

There is no standard rate, so you can negotiate depending on the amount you’re asked. It ranges between 1% and 5% of the asking price of the home.

LEASE-OPTION VS. LEASE-PURCHASE>

A rent-to-own agreement involves two types of lease agreements, which include: the lease option and lease purchase. Regarding the lease option, the buyer can purchase the home at the end or even before the lease expiration date.

It’s not a legal requirement for you to purchase the home. Nevertheless, if you decide not to purchase the house, you forfeit any amount of money you paid towards the purchase during your lease.

However, a lease-purchase is different because you’re legally required to purchase the home by the time your lease ends. It’s important to get a real estate attorney, so they can go through the lease or rent-to-own agreement and give you an explanation before you sign it.

Getting to know the terms of the agreement saves you from making decisions you might regret later. Also, speak to a lender to ensure you understand what you’ll need to qualify for a loan when the time comes for you to purchase the home.

PURCHASE PRICE AGREEMENT

Rent-to-own agreements should fully specify when a rent to own home is to be purchased and for how much. In some instances, the buyer and the seller might agree on the purchase price when the rent-to-own agreement is signed.

The price is often higher than the current market value. Sometimes, the buyer and seller agree on a purchase price after the lease has expired. It is determined by the property’s market value at that time.

Many buyers prefer to “lock-in” a purchase price in markets where prices for homes are trending upward.

RENT TO OWN HOMES PROPERTY MAINTENANCE

You might be responsible for maintaining the property and paying for any repairs depending on what your contract states. Also, if you are interested in rent-to-own mobile homes or rent-to-own trailers, the maintenance aspect may be different from a traditional home.

Typically, the landlord handles the maintenance needs in a traditional rental agreement. However, the renter in a rent to own home may be financially responsible for some or all maintenance issues.

Be sure to read the contract carefully. Most sellers will decide to pay for these expenses because they’re ultimately responsible for all types of homeowner association fees, insurance, as well as taxes.

No matter what the case, you need renter’s insurance coverage to protect against losses to any personal property, and provide liability protection if someone gets injured within the premises.

Make the time to talk to a real estate attorney, so they can explain the responsibilities you have in terms of any maintenance issues, as stated in your contract. You might be responsible for all upkeep and repairs, or simply basic lawn maintenance.

However, gain a full understanding of all responsibilities, order an appraisal, do a home inspection, and ensure the property taxes are current prior to signing the contract.

IDEAL RENT TO OWN HOME CANDIDATE

If you wish to own a home but aren’t fully ready yet in terms of your finances, a rent to own home agreement might be the perfect situation.

You can properly organize your finances, fix your credit, and improve your score while locking in your dream property, through the agreements. You can build some equity if a certain amount of the rental payment goes to the buying price.

The main aim for rent to own home agreements has always been to help individuals who aren’t eligible for conforming loans, but there is also another group of people who can get mortgages inexpensive, non-conforming loan markets.

People who may barely meet the minimum credit requirements, but don’t want a sub-prime mortgage, have a hard time finding homes inexpensive real estate markets. Rent to own homes isn’t usually found in high-cost markets.

However, in rare situations where a match can be found, a consumer can live in the home they desire, build equity, and capture market appreciation without buying the property upfront.

A portion of every rent payment and option fee reduces the purchase price dollar-for-dollar. Through that, the rent and buying price are then locked in for up to 5 years.

THE BUYER’S PERSPECTIVE ON A RENT TO OWN HOME

As a buyer who’s about to make an important decision on buying a property, it’s wise to consider the pros and cons of renting to own. It might be a beneficial option depending on your financial situation. The following are some pros and cons.

PROS

● An agreement for rent to own houses is advantageous to those who would struggle to get approved for a mortgage under normal circumstances. It gives you a chance to get a home you love while rebuilding your credit, boosting your income, and other ways to make yourself appear more appealing to mortgage lenders.

The period of your rent to own agreement is like a grace period to help you qualify for a mortgage after the lease expires.

● The second benefit of a rent to own home is that it gives you the opportunity to lock in a price that will not increase as the market increases. This is a wonderful aspect, especially during periods when home prices are considerably high.

You can also build equity on the property before you buy it, if the option money, or part of the rental payment, goes towards the purchase price.

CONS

● If you do not want to purchase the home after the lease expires, you’ll be out of the option fee as well as monthly rent and have nothing to show for it.

● If you don’t fix your financial problems, you still might not be qualified to purchase the home, mobile home, or trailer after the renting period ends.

Who Delivers Your Offer to the Seller

THE LANDLORD/SELLER PERSPECTIVE ON A RENT TO OWN HOME

A seller can enter into such a rent to own home agreement for many reasons. There are both benefits and risks.

PROS

● A rent-to-own home increases the options for buyers if a seller is having a hard time selling the home through traditional methods.

● Someone who has an interest in owning the property will end up taking better care of it than those who are only there for a short period.

CONS

● A buyer can change their mind and decide not to complete the purchase process at the end of the agreement. It’s not 100% certain that a seller will sell the home once the lease has ended.

● The seller doesn’t get a huge amount of money from the buyer.

● It’s possible in some cases for the seller to also lose out on the rent-to-own home deal.

BOTTOM LINE

If you decide to consider rent to own houses, ensure it’s the right thing for you. Be sure your income and credit are moving in a direction that allows you to qualify for a traditional mortgage loan after your lease is over.

Think about whether the home and location will still appeal to you and work for your lifestyle in the years to come. A rent to own home can work well for you, as long as you are consistent in putting in the work necessary during the rental period of your agreement.

Disclaimer: This article is meant for educational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.

References:  Rent to Own, rent to own home, rent to own house, rent to own trailer, rent to own mobile home, rent to own agreement

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