The process of renting a home for a particular period of time is called rent-to-own homes or lease to own homes.
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However, in this manner, you could always have the option to purchase the house after that certain period that is being stated in the rent-to-own agreement. The monthly rental payment could serve as an income for the seller and part of that payment would serve as the down payment of the house. This basically explains what is rent to own homes all about. And now you can browse our huge list of rent to own homes listings and find your new home today.
Rent To Own Homes How Does It Work
Home ownership is a great thing, but if you are not ready for the responsibilities that come with home ownership, then you might want to try rent-to-own homes. Rent-to-own allows people to get a feel for home ownership before they get that big loan and lock themselves in for thirty years. This can immediately tell you whether owning a home is the right thing for you.
Rent to own homes involves the seller acting as a lender to the buyer. The seller and buyer negotiate on a price the home will be sold at after some time. When you find a home that you wish to rent to own, you can iron out all of the details with the seller. They are often going to be more flexible with you than traditional lenders are. For example they may allow you to choose the day of the month that your payments are due and other factors that can affect your budget.
Rent-To-Own Homes is Mortgage Alternative
Many people that do not have the ability to get a mortgage can rent to own homes instead. This way, you can put down on contract that you want to buy the house and nobody else can purchase it.
During economic downturns many people rent to own homes since getting a mortgage will be hard. Investors like to rent to own homes since it allows them to acquire more properties without the hassle of getting many loans.
If you are looking for rent to own homes, it may be an arduous task since a lot of people do not know how it is done. In this situation, you should talk to the owner and explain to them the benefits of rent-to-own agreement and get them to go along with it.
One good thing about the seller is that, they might have bought a new house already but still it possible for them not to pay the mortgage of their two units simultaneously. Thus this would give them the chance to spend less. It could also be beneficial to the renters since they could stay in the kind of house that meet their standard at once and at a reasonable price.
The Rent-To-Own Homes Agreement
In a rent-to-own agreement (also called a lease to own or just lease purchase option), prospective buyers get to move in a home right away after the deal has been made. Of course, there are certain terms and conditions that need to be met for the contract to be validated.
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Rent To Own Homes Option Fee
Option Fee – It is a fixed amount that the renter (or the prospective buyer) needs to pay to the seller. It is a one-time, usually non-refundable amount which provides the buyer an option to purchase the house in future. Note that paying the option fee does not constitute any obligation on the buyer’s part, but merely grants him the “right” to purchase the property when the contract expires.
If the buyer ends up buying the house, the option fee becomes part of the down payment. However, if the buyer ultimately decides to not purchase the house at the end of the lease, the option fee simply expires or in other words, becomes the seller’s income.
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Rent To Own Sale Price
Sale Price – The sale price or purchase price of the house is an amount that the seller and the buyer agree upon before they enter an agreement or in some cases, after the lease expires. In the first scenario, the seller and the buyer agree upon a sale price that is at or higher than the current market price of the house. Once the contract is signed, the sale price is locked in for the rest of the lease term (usually 1-3 years). No matter if the housing prices rise or fall during that period, the sale price cannot change.
On the other hand, in the second scenario, the seller and the buyer agree upon a sale price when the lease expires. The price derived is based upon the market value of the house at that point of time in future.
As is quite evident, most of the buyers prefer to go for the first scenario, wherein they try to lock in a sale price, just in case the housing prices increase in the future.
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Rent To Own “Rent Premium”
Rent Premium – The term used here is “rent premium” and not simply rent. This is because in a rent-to-own option, the buyer has to pay a slightly higher amount than the typical rent for a property. The extra percentage of each monthly rent payment (called rent credits) goes toward the down payment for the property, if the buyer chooses to ultimately buy it. If at the end of the lease, the buyer can not or does not choose to buy the property, the seller keeps all the money.
Apart from these, the buyer and seller must also agree upon necessary maintenance and repair requirements in the contract. Also included should be clear specifications about who is to incur other costs such as homeowners association fee, property taxes, insurance etc.
At the end of the lease term, if the buyer/renter decides to purchase the property, he/she can opt for a financing option (such as a mortgage) to pay the seller. At that point, the option fee and the extra rent credits earned by the buyer goes towards completing the transaction and settling the sale price of the property.
Rent To Own Homes Pros
Buyers
- No need for any huge down payments
- No need to worry about qualifying for a mortgage
- Buyers get ample time to repair their credit history and improve their credit score
- Buyers get ample time to build upon sufficient cash for down payment once the lease expires
- Buyers get to “try out” the house (and the neighborhood) before they actually purchase it
- By locking in a sale price and contract terms, buyers remove any risks associated with rise in housing prices
Sellers
- Rent to own process allows sellers to make profit on a house they have been unable to sell off otherwise.
- Sellers can lock in a house at a higher price than the current market value and get rid of any price fluctuation risk in the future.
- A buyer is more likely to buy out a house simply because of the option fee and the rent premium that has already been invested in the house.
- Renters are more likely to treat a lease option house better if they are planning to own it in the future, than if they were to vacate in a year or so.
- Sellers earn timely rents which they can use to pay off the old mortgage and taxes on a house.
- Even if the buyer ultimately fails to purchase the property, sellers are left with the rental incomes (rent + rent credits) and the option fee.
Rent To Own Homes Cons
Buyers
- Since the rent-to-own process is not tightly regulated, buyers can become victims of unscrupulous sellers who have no intention of ever selling their property. He/she can try to impose extreme or unusual contract agreements. e.g. A seller can make the contract void if the buyer fails to pay the rent on time even once and evict them.
- Buyers “have to” pay the option fee upfront, which can still be a sizable amount. If they don’t purchase the house in future, they end up forfeiting the amount.
- If the seller fails to pay the original mortgage on the house, it can be foreclosed and the new buyers can be forced to evict.
- Buyers usually don’t get the rent credits back (the premium they pay on top of the usual rent) when the lease expires, if they fail to purchase the house.
Sellers
- If the buyer backs out of a purchase when the lease expires, the sellers have to go through the entire listing process again.
- There is always the risk of a new buyer coming along who is ready to pay a higher price for the same house.
- If the renter can’t make rental payments, sellers might find it difficult to pay off the old and any new mortgages they might have availed after entering the rent-to-own option. The situation can lead to a foreclosure.
Bottom Line
Because rent-to-own homes is still not very common and not tightly regulated (as stated earlier), both buyers and sellers must obtain assistance of a real estate attorney (on either side) while making a deal. Both parties should be fully aware of their inherent responsibilities and rights concerning the property in question. Overall, while there are many pitfalls to this process, there are plenty of benefits to avail for everyone concerned as well. Sellers get to earn money off the otherwise unsaleable or vacant properties, and buyers are provided with an affordable housing option to become homeowners in near future.