Rent to own homes are a unique arrangement in the real estate industry. It allows tenants to rent a property for a specific period with the option (or requirement) to purchase it. The tenant pays for the property before or when the lease expires.
This arrangement can be attractive for those who want to buy a home but need time to save. This type of plan is also patronized by those who which to improve their credit score. Some key features are unique to rent-to-own homes. Some of these key features include;
Key Features of Rent-to-Own Homes:
- Lease Agreement: You enter into a standard rental agreement, often for 1-3 years. The tenant and house owner will agree on what period the property will be leased for before it is paid for.
- Option to Purchase: At the end of the lease, you have the option to purchase the home at a pre-agreed price. It can also be an obligation to buy depending on the contract. If they do, the option fee and any accumulated rent credits are applied to the purchase price.
- Rent Premium: A portion of your rent payments may be set aside toward the eventual down payment or purchase price. This helps the renter accumulate equity over time. Again, this will depend on the contract agreements.
- Purchase Price: The purchase price is usually set when the lease is signed. This protects buyers if property values increase, but could also be higher if the market drops.
- Option Fee: This is an upfront payment (typically non-refundable) that gives you the option to buy the home later. It can range from 1% to 5% of the purchase price.
How Rent To Own Homes Works
A rent-to-own agreement typically consists of the following parts.
- The renter finds a rent-to-own property.
- The renter signs a lease agreement with an option to buy.
- The renter pays the option fee and rent premium.
- The renter occupies the property, maintaining it as they would if they owned it.
- At the end of the lease, the renter can:
- Exercise the option to buy at the predetermined price.
- Renew the lease.
- Walk away, forfeiting the option fee.
This arrangement can be a viable option for those who may not currently qualify for a mortgage. It allows them to work towards buying a home over time.
Pros and Cons of Rent-to-Own Homes
Here’s an overview of the Pros and Cons of rent-to-own homes.
Pros of Rent Own Homes
Pathway to Homeownership:
Rent-to-own can be a great option for those who may not yet qualify for a mortgage because of poor credit. lack of a down payment, or other financial barriers. The time renting allows potential buyers to improve their credit score or save for a down payment while living in the home.
Locked-in Purchase Price:
In a rent-to-own agreement, the purchase price is often locked in at the time of the contract. The renter could potentially buy the home at a lower price than its current market value. This is if the real estate market appreciates during the lease period.
Test the Home and Neighborhood:
Renting before buying allows you to get a feel of the home and the neighborhood before deciding. If any major issues arise, you have the option to walk away from the deal at the end of the lease. And you can do that without committing to a large investment.
Build Equity:
With rent credits, you can build equity toward the home’s purchase price over time. This makes the eventual down payment smaller.
Cons of Rent to Own
Non-Refundable Fees
The option fee is typically non-refundable. If you choose not to buy the home at the end of the lease period or fail to secure financing, you lose this investment.
Risk of Losing Rent Credits
If you fail to purchase the home, any rent credits you’ve accumulated are forfeited. Also, if the housing market declines, the locked-in price may no longer be attractive. Yet, you will still be bound by the terms of the agreement.
Market Risk
Locking in a purchase price can be beneficial in a rising market. But it can also work against you if home prices decline during the lease period. This will leave you with a higher purchase price than the market value.
Potential for Eviction
Just like with a standard rental agreement, failure to make timely rent payments can result in eviction. This will nullify the purchase option and cause the renter to lose any money already invested. This includes option fees and rent credits.
Limited Inventory
Rent-to-own properties are not as common as traditional homes for sale or rent. So, finding a property in your desired location may take time and effort.
If you’re considering any of these options, make sure you understand the contract terms and if they’re favorable to you. Also, before entering a rent-to-own agreement, there are a few factors to consider.
Key Factors to Consider in Rent-to-Own Homes
- Understand the Contract Terms: Rent-to-own contracts can be complex, so it’s crucial to fully understand the terms before signing. Ensure you know how much of your rent goes toward the purchase price, the option fee, and the duration of the lease.
- Get a Home Inspection: Before entering into a rent-to-own agreement, have the home inspected by a professional. This will help you identify any potential problems that could become costly down the road.
- Consult a Real Estate Attorney: Rent to own contracts are not exactly straightforward. You may need to have a real estate attorney review the agreement to protect your interests. They can help ensure the contract is fair and legally binding.
- Financial Readiness: Consider your financial situation accurately. Make sure you are ready to buy the home at the end of the lease term. If you’re using this time to improve your credit or save for a down payment, ensure you’re on track to meet your goals.
- Market Conditions: Take into account the local housing market trends. Locking in a price early can be an advantage in a rising market. However, it can become a drawback if home values decrease during the lease period.
Not everybody considers a Rent-to-Own home because they are typically best suited for individuals who:
- They have poor or insufficient credit to qualify for a mortgage but are working on improving their financial situation.
- Need time to save for a down payment but want to begin investing in homeownership now.
- They are confident they want to live in the home long-term and believe the housing market will rise, making the locked-in price a good deal.
Where to Find Rent-to-Own Homes
- Local real estate agents
- Online marketplaces (Zillow, Trulia, )
- Rent-to-own websites (RentToOwnLabs)
- Property management companies
- Allow us to help you find one
Conclusion
Rent-to-own homes can offer a flexible route to homeownership for those who need time to improve their financial standing. However, it’s essential to understand the risks involved. This includes non-refundable fees and the potential for losing amassed equity if the purchase doesn’t go through. As with any significant financial decision, careful planning, and a thorough understanding of the contract terms are crucial to ensuring a successful rent-to-own experience.
