How Rent To Own Works

Essentially, in a rent-to-own situation, a homeowner who wants to offer his or her home as rent-to-own signs an agreement with a prospective buyer. Once the agreement is signed, the buyer can move into the home. This buyer rents the home for the amount of time specified in the lease, and at the end of this lease term, he or she has the option to purchase the home from the seller. This is just an option and the renter / buyer is under no obligation to execute the purchase. It's a great way of test driving before you buy.

Purchasing the Option

This option to buy at a point in the future comes at a cost, called “option money”. This is a non-refundable fee that the prospective buyer pays to the seller at lease signing. It gives the buyer the option to purchase the home when the lease term expires. If the buyer changes his or her mind at the end and decides to not purchase the home, the option expires and the home can then be legally offered to another buyer.

While most contracts include the option to purchase, it’s important to realize that not all rent-to-own contracts treat the purchase as optional. Some contracts legally require the buyer to purchase the home at the end of the lease term. It’s always a good idea to have a real estate attorney review any documentation prior to signing to ensure you are fully aware of the terms of your specific agreement. Be sure the document lists the purchase as optional, and is not simply listed as a lease purchase agreement.

Cost to Purchase the Option

The cost to purchase this option, called the size of the option, is usually something that can be negotiated with the seller. The cost is typically between 2.5% and 7% of the home’s purchase price. One benefit of rent-to-own contracts is that a portion or all of the option money can be put towards the purchase price at closing, as long as this is specified in the contract. This is another important clause you should have a real estate attorney help you with, as it could reduce your required down payment considerably. The amount of cash you would have to bring to the table at closing is considerably less with a rent-to-own contract. For instance, if the buyer were to purchase a $250,000 home today with traditional financing, he or she would be required to come up with a 20% down payment, or $50,000. If he were to instead purchase the home as a rent-to-own, with an option consideration of 7%, he would only need to pay $17,500 up front. Purchasing a home with a rent-to-own option could save the prospective buyer a lot of money up front.

Rent

During the term of the lease, the prospective buyer pays the monthly rent to the seller. Another benefit of rent-to-own purchases is that some contracts include a rent credit clause. This basically states that a percentage of your monthly rent payment can be applied towards the purchase price of your home at closing, which after a long lease term, can be quite substantial. Because this is seen as a benefit to buyers, homes that are offered as rent-to-own are typically priced above the average market rate for a similar rental property. The seller also benefits from rent credit, as he or she receives the increased rental price from the prospective buyer.

Property Maintenance

It’s important to specify which party is responsible for property maintenance with a rent-to-own contract. The contract may place the buyer in the position of responsibility to pay for all taxes, insurance, and HOA fees. But because the seller is still technically the owner of the property and is therefore still responsible for it, the seller may choose to pay for these expenses. Regardless, it’s always a good idea for the buyer to have a renter’s insurance policy to cover any liability on the property and to cover any damages to personal property that may arise.

Purchasing the Property

The purchase price of the home is typically determined in the rent-to-own lease agreement. Seller and buyer can decide to agree on a purchase price at the beginning when the lease is signed, or they can agree to defer the purchase price until some point in the future, and base the price off of the future market conditions.

If the prospective buyer decides they are not interested in purchasing the home, or they are unable to obtain the necessary financing when the lease has ended, the option to buy expires and they no longer have first claim to purchase the home. At this point, the buyer loses any money they may have already paid, including any option money and any accumulated rent credit.

If the prospective buyer decides to purchase the home, he or she then applies for financing and the seller is paid. At this point, any option money or rent credit will be deducted from the purchase price, as specified in the contract. The transaction is then finalized, and the buyer becomes the new homeowner.

However, if the buyer is not able to purchase the home, but is legally required to per the agreement, the seller may begin legal proceedings if necessary.






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