How Rent To Own Works

A rent-to-own situation basically entails a homeowner wanting to offer his or her home as rent-to-own and signing an agreement with a prospective buyer. Upon signing of the agreement, the buyer can move into the home, renting it for the amount of time specified in the lease. At the end of the agreed lease term, there is an option to officially purchase the home from the seller.

Buying Option

This option to purchase at a point in the future has a cost, called "option money." This non-refundable fee is paid to the seller at the lease signing. This gives the buyer the option to purchase the home at the end of the lease term. If the buyer happens to change his or her mind at the end of the lease and decides not to buy the home, the option expires and the home is legally available to be offered to another buyer.

Although most contracts include the option to purchase, it's important to keep in mind that not all rent-to-own contracts treat the purchase as optional. There are some contracts that legally require the buyer to purchase the home when the lease term is up. It's best to have a real estate attorney to review any documentation prior to signing to be fully aware of the terms at hand.

Cost To Purchase The Option

Known as the "size" of the option, the cost to purchase the option is usually something that is negotiable with the seller. Typically this cost ranges between 2.5% and 7% of the home's purchase price. One benefit of a rent-to-own contract is that all or a portion of the option money can be applied toward the purchase price at closing. This stipulation must be specified in the contract, serving as another important clause you should have an attorney to help you review. Your down payment can be reduced considerably with a rent-to-own contract.

Rent

During the lease term, the prospective buyer makes monthly rent payments to the seller. Another benefit of the rent-to-own process is that some contracts come with a rent credit clause. This clause states that a percentage of your monthly rent payment can be applied toward the purchase price of the home at closing. This is significant because after a long lease term, the price can be quite substantial. Since this is seen as a benefit to buyers, homes offered as rent-to-own are usually priced above the average market rate for a similar rental property. Rent credit also benefits the seller, as he or she receives an increased rental price from the buyer.

Maintenance

It's important for the rent-to-own contract to specify which party is responsible for property maintenance. The contract may state that the buyer is responsible for paying all taxes, insurance, and HOA fees. However, because the seller is still technically the owner of the property and is still therefore responsible for it, he or she may choose to cover these expenses. Regardless, it's in the best interest of the buyer to have a renter's insurance policy to cover any liability on the property as well as any personal property damages that may arise.

Purchasing The Property

The lease agreement is typically where the purchase price of the home is determined. Both parties can decide to agree on a purchase price at the beginning with the lease signing, or they can defer the purchase price until some time in the future, basing the price off of the future market conditions.

If the prospective buyer ultimately decides that they are not interested in purchasing the home, or they are unable to secure the necessary financing upon the expiration of the lease, the purchasing option expires and they no longer have first claim to the home. At this point, the prospective buyer loses any money that they may have already paid, including option money or accumulated rent credit.

If the prospective buyer decides to purchase the home, can apply for financing and the seller is paid. With financing obtained, at this point any rent credit or option money will be deducted from the purchase price, as specified in the contract. With the contract finalized, the buyer officially becomes the new homeowner.

However, legal proceedings may be initiated if the buyer is not able to purchase the home but is legally required to, per the contract.






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