Know about rent-to-own
Rent-to-own refers to an agreement if you want to become a homeowner, but are quite not ready for it as of now due to a lack of finances. Thanks to this agreement, you will get a chance to get your finances in order, improve your credit score and save money for a down payment while locking the house with options money you would like to own. Here the present homeowner gives his tenant a right to buy the house at some point in the future, for a price that is agreed upon today.
Know about key elements of rent-to-own
- This agreement commits to renting a property for a specific period, with the option of buying it before the lease runs out.
- It includes a standard lease agreement with an option to buy the property later in the future.
- You need to pay rent throughout the lease, and in some cases, a percentage of the payment is applied to the purchase price.
- With some rent-to-own contracts, you may have to give the property maintenance and repair charges.
Know the benefits of rent-to-own for both sellers and tenants-
Seller’s benefit from rent-to-own agreement:
Chances of more buyers: This agreement will give a chance to the seller to attract more buyers. By doing so, sellers also give the renters market who hope to fulfill their dream of buying a house in the future.
A good chance to earn an income: If the seller doesn’t need to sell the property right away and won’t use the money for another down payment, this can be a great option. This agreement provides the opportunity for the lender to earn good rental income while moving toward selling a property.
The perk of getting a higher price: Sellers have the right to ask for a higher sales price when they offer rent to own. Buyers usually don’t want to leave the opportunity and hence agree to it.
Invested renter: Well a potential buyer is more likely to take care of a property in a much better way than a renter. The renter/buyer is already invested in the property and has an interest in maintaining it.
Buyer’s benefit from the rent-to-own agreement:
Buy with bad credit: Buyers who cannot qualify for a home loan due to their affected credit score can get a chance to buy a house with a rent-to-own agreement. Over time, they can work on rebuilding their credit scores, and may be able to get a home loan when the actual time comes to buy the house.
Lock-in a buying price: With high inflation and increasing home prices in the market, buyers can get an agreement to buy at today’s price. Buyers even have the option to back out if home prices fall. However, whether or not it makes sense financially will depend on how much they have paid under the agreement.
Get the experience of living in the property they wish to buy: This would give them a great chance to the buyers to live in a home before committing to buy it. As a result, they can learn about issues with the house, nightmare neighbors, and any other problems, before it’s too late.
Helps in reducing the moving cost: When the buyers are committed to buying a property where they are currently living, it eventually reduces the cost of moving after a few years from here and there.
Know the drawbacks of rent-to-own for both sellers and tenants-
Risk for buyers-
- If you don’t buy the home you will likely lose all the extra money you paid.
- Making your dream of buying a home come true with rent-to-own agreement can be a slow process with slow progress as you might plan to improve your credit or increase your income so that you can qualify for a loan when the lease ends, but things might not work out as planned.
- As you don’t yet own the property, so you don’t have total control over it. The landlord may interfere in a lot of matters that you may want to take.
- Home prices might fall and you might not be able to renegotiate a lower purchase price as per your contract.
- Depending on your agreement, if you cannot able to pay rent on time, you may lose the right to purchase the property.
- There are chances that you may find problems with the property you don’t know about until you try to buy.
- Rent-to-own can be an appealing way to take large sums of money from people who are not financially sound.
Risk for sellers-
- There is no certainty for the seller that the renter might buy the property, so if they don’t, you have to start all over again and find another buyer or renter.
- You don’t get a large lump sum, which you may need to buy your next property.
- You never know about the rise and fall of property prices. So, if you have lock-in the sale price you can’t do anything when the home price rises.
Know about the process of rent-to-own homes
Non-refundable upfront fees
In this agreement, the buyer has to pay a one-time upfront fee called the option money to the seller which gives the buyer to lock in the price of the house to buy the house someday in the future with today’s fixed price. The option fee that a buyer gives to the seller is generally non-refundable.
Lease option vs. lease-purchase
There are different types of rent-to-own contracts available some being more consumer-friendly and more flexible than others. Lease-option contracts give you the right, but not the obligation, to buy the home when the lease expires. In lease-purchase contracts, the tenant is legally obligated to buy the home at the end of the lease, whether you can afford to or not.
Giving consent on the purchase price
Rent-to-own agreements should specify when and how the purchase price of the selling property is determined. In some cases, the buyer and the seller will agree on a buying price when the contract is signed, often at a higher price than the current market value. In some other cases, the price is usually determined when the lease expires, based on the property’s then-current market value.
Applying rent to the principal
You are required to pay the rent of the property you are currently residing in and want to buy in the future throughout the lease term. The question is whether a portion of each payment is applied to the eventual buying price. You need to be sure about what you are getting for paying that premium.
Paying home maintenance and repair charges
The tenant may be responsible for maintaining the property and paying for repairs that they want to buy in the future. This will eventually depend on the terms of the contract you are signing with the seller.
Know about things to keep in mind before you sign the contract
- Always select the right terms that work in your favor
- Get help from a qualified real estate attorney to explain the contract and help you understand your rights and obligations.
- Feel free to negotiate some points before signing the contract or avoid the deal if it is not suitable for you.
- Be clear about the deadlines, option fee, rent payments, and other important things before you sign the contract
- Double-check if you have to pay maintenance and repair costs for the house
- Research well about the home
- Research about seller’s credibility, credit report, home documents, and financial background.