The rent to own homes are not as quite common as the usual rental or for-sell homes but are available in most towns. Due to the rising interest rates and the compact housing rules, it has become harder to qualify for a mortgage nowadays. This drives many home seekers to regard rent-to-own as the best option to own a home.
Rent-to-own homes involve a process where an investor or homeowner, rents out their property to a tenant but gives the tenant the option to purchase the home after a certain period at a pre-determined price.
Thus, you get the opportunity to rent a home advertised as a rent-to-own and pay the agreed monthly rental costs. on top of this, you also pay an agreeable amount intended for the purchase of the home. At the end of the lease period, you get to own the house when you have fully covered the agreed buying price of the home. This can sound attractive for those who can’t qualify for a mortgage but it is wise to consider all the pros and cons before you sign the rent-to-own contract.
For most homeowners, this is a good incentive or strategy to get their homes sold despite taking payments for a specified period.
On the other hand, homebuyers who don’t have a good credit score and rating, and have a low amount of savings for the down payment, find this method of buying a home attractive. Rent to own homes helps you get a house immediately and also get sufficient time to build your credit score, while at the same time paying the down payment in the form of the agreed monthly rent.
How Does Rent To Own Homes Work?
In most cases, the rent-to-own homes feature newly renovated suites in popular locations and are listed as rent-to-own with monthly rent. The seller, after screening the tenant for decent credit (employment and potential for purchasing the home at the end of the term), gives the tenant the right to rent and buy the house in the future.
Usually, a rent to own home is purchased at a price that is approximately between two to three years of rent, which is agreed upon at the start of the agreement. The final purchase price of the house is generally locked in. Thus, tenants don’t face any surprises on the final price they’ll pay at the end of the term. However, some contracts use the property’s future appraised value to set the price.
Tenants are then required to put down a 2% – 2.5% deposit which is generally $5,000 to $10,000 towards the final sale price. This goes towards the purchase of the home and is non-refundable. This means if the tenant decides not to buy the house, they lose the option deposit and rent credits.
A rent credit, which is usually a small portion at the discretion of the investor, is then put against the purchase price of the home.
When you find a home for rent that also features the rent-to-own option, the lease-purchase should have the following major provisions included:
- Rent amount.
- Rent payment due dates.
- How rent is to be paid.
- Date to legally take possession of the property.
- Contract expiry date.
- The person who is responsible for paying for the utilities.
- Final purchase price of the property.
- A window of opportunity to purchase the property.
- How much of the rest goes toward the down payment?
- Amount of down payment required at the initial stage.
From the investor’s perspective, the pros of rent to own homes are as follows:
- Unlike rental houses, the rents for rent-to-own are usually higher, and you must be prepared for this. After all, you may have no other option due to a poor credit score. The investor thus benefits from the high monthly rents.
- The deposit amount is collected upfront, and it’s non-refundable when you change your mind about buying.
- The tenant typically treats the home as their own and takes care of all maintenance and repairs.
- Guaranteed sale price if the tenant exercises their option.
The cons of rent to own homes to the investor are as follows:
- Setting a ceiling on the selling price of the house, especially in appreciating markets.
- Initial due diligence is required to screen tenants.
- Tenants can walk away from the deal at any time. But terms of the purchase agreement bind investors.
From the tenant’s perspective, the pros of a rent-to-buy home are as follows:
- Tenants can “test” the house and the neighborhood and can walk away from the deal anytime by just canceling the option.
- Tenants with mediocre credit can build their credit over the term and give their down payment via rent credits. This is not so in the for-sale homes, where the credit score is vital.
- Tenants with bad credit scores can improve them by making timely payments of the rent.
- If the market price of the house is more at the end of the lease period, one still gets to buy it at the same rate. Thus, rent fluctuations won’t affect the final agreed price of the house to be paid.
- If the market collapses and the house price is less than the agreed-upon price, then one doesn’t have to go through with the purchase.
The cons for the tenant include:
- The tenant pays premium rent for the “option” to purchase the house. If the tenant decides not to buy, the option deposit is lost.
- Bank financing is not guaranteed at the end of the term.
In rental homes, the lease agreement is normally straightforward, since the rent is paid according to the agreed term. However, in rent-to-own homes, it’s generally on the safer side for both parties to involve legal advice since some agreements state that if the rent is late just once, the tenant forfeits the right to buy the home.
The tenant should also have the title checked to make sure that the correct owner of the home is giving the option.
The other essential thing, landlords need to make sure that the option payment is covered in a separate agreement, and is not included in the lease. If it’s included, and the tenant defaults, it can’t be very easy to evict the tenant from the property.