For most people, owning a home is a major life goal. However, due to the competitive and ever-changing housing market, high prices, and strict qualification requirements for a down payment or mortgage, homeownership has become increasingly difficult to achieve.
As a result, those seeking to own a home may be finding it difficult to climb the property ladder, with factors such as a good credit score and cash for a down payment being essential requirements. In this context, rent-to-own homes have emerged as an alternative option, whereby a prospective buyer rents a house for a limited time, with the option to buy it before the lease expires.
This article explores rent-to-own homes, including how they work and what to consider before signing such an agreement.
What are Rent-to-Own Homes?
Rent-to-own is a pathway to homeownership whereby a prospective homeowner rents a property from an owner, with a portion of the rent payment accruing towards building equity or ownership in the property.
The agreement between the parties is typically based on a set period, usually one to five years, with the intention of buying the property. As part of the agreement, a portion of the rent (known as a “rent credit”) paid each month can count toward the down payment on the property.
There are two types of rent-to-own agreements: lease-option agreements and rent-purchase agreements.
The former gives the renter the right, but not the obligation, to buy the home when the lease expires.
If the renter decides not to buy the property at the end of the lease, the option expires, and they can walk away without any obligation to continue paying rent or buy the property.
However, a non-refundable deposit (1% to 5% of the property’s asking price) is typically required to secure the right to make an offer to buy the home in the future.
If the renter chooses not to buy the home, they are unlikely to receive a refund of the deposit or rent money set aside for the down payment.
A rent-purchase agreement, on the other hand, obligates the renter to buy the house after the leasing period has expired. The renter gives a deposit and sets aside a portion of the rent payment for the down payment on the house.
If the renter breaks their commitment to buy the house at the end of the contract, they lose the extra rent money and deposit and could face additional fines.
Each rent-to-own agreement is unique, and it is important to read the agreement carefully and have a lawyer examine it to ensure complete understanding of rights and obligations.
How Does Rent-to-Own Work?
A formal legal contract must normally be signed to enter into a rent-to-own agreement. The conditions of the agreement and whether the renter is required to purchase the home or has the option to do so should be made clear in the contract. A rent-to-own agreement should contain several essential details.
Negotiate the Purchase Price
A rent-to-own agreement should be clear about when and how the purchase price of the house will be established before signing it. After the contract is signed, the seller and the renter may agree on a purchase price that is frequently more than the current market worth.
In other cases, the price is established based on the property’s then-current market value when the lease expires. In places where property prices are on the rise, many purchasers seek to “lock in” the purchase price.
Even if the house’s value doesn’t increase, the seller will lock in that price now because they believe it will be worth an additional amount in the future.
Check if rent payments are added to purchase price
If some of your rent is deducted from the principal value of the house must be negotiated.
“Will my monthly payments be lower if I rent to purchase a home?” The response is no!
In reality, lease-to-own rent payments are often higher than ordinary rent pricing in the same location. This is so that most sellers can utilize a portion of your monthly rent payment as credit for a future purchase.
They boost the rent to make up the difference since they put that money away for you rather than keeping it for themselves.
Don’t get your hopes up if you’re seeking rent-to-own properties with modest monthly payments.
Even if your rent doesn’t go toward the purchase price, rent-to-own homes usually cost more than renting a regular apartment because you might be stuck paying for upkeep.
With rent-to-own contracts, the seller may demand that you pay unforeseen expenses like homeowners association (HOA) dues, home maintenance bills, and property taxes while you are renting.
It implies that you can be responsible for paying everything from gardening costs to fixing a malfunctioning air conditioner.
Because of this, it’s crucial to carefully read the contract with a real estate lawyer who can outline each party’s obligations. You might lose a lot of money if you don’t.
Transition to purchase
Depending on the sort of agreement you signed, what occurs when the contract expires may change. You’ll probably need to get a mortgage (or other financing) if you have a lease-option arrangement and wish to buy the property in order to pay the seller in full.
In contrast, the option expires and you vacate the property as if you were renting any other property if you decide not to purchase the home or are unable to obtain financing before the end of the lease period.
You’ll probably lose whatever money you’ve already paid, including the option money and any rent credits you’ve accrued, but you won’t be required to keep renting the property or to buy it.
After the lease ends, you can be required by law to purchase the property if you have a lease-purchase agreement. This may provide issues for a variety of reasons, particularly if you are unable to obtain a mortgage.
Most of the time, lease-option agreements are preferred over lease-purchase agreements because they are more flexible and protect you from legal action if you decide not to or are unable to purchase the house at the end of the lease.
Do your homework, investigate the neighborhood, compare prices with those of similar homes nearby, examine the contract, and research the seller’s background. Approach the process as if you were purchasing a property entirely.
Rent-to-own agreements can be a good option for individuals who want to become homeowners but are struggling to overcome the barriers to entry that come with traditional home buying.
However, it is important to carefully read and understand the terms of the agreement and work with a real estate lawyer or agent who can help guide you through the process.
By doing so, you can take advantage of the benefits of a rent-to-own agreement and achieve your dream of homeownership.