Typically, first time home buyers get a mortgage to finance the purchase of a new property. Your global location dictates the process for being approved for a mortgage. In most cases, you need a strong credit score and enough money to cover the houses downpayment.
However, there is now a new eccentric method emerging for future homeowners need to be aware of, Renting-to-own. The rent-to-own model – which allows tenants/home buyers to have the option of purchasing the house they are renting from their landlord/property manager.
When a tenant opts to work towards the rent to own model, Typically a portion of their monthly rent will accrue towards a downpayment to purchase the property they are leasing.
This model of purchasing hasn’t always been so popular. In the years following the 2007 financial crisis, renting to own experienced an enormous spike in popularity. Large real estate firms purchased foreclosed homes nationwide and implemented the rent-to-own model through them.
This helped establish the rent-to-own model as a legitimate alternative to the standard home buying process.
With the rent to own option now solidified, Tenants are more curious than ever about how it works, and if it could be the right option for them, We will answer everything you need to know about renting to own and if it is the right match for you.
As part of the rent to own agreement, you must pay the seller a one time, (usually nonrefundable) “option fee.” This fee gives you the option to purchase the property by a specific date in the future.
In most cases, the fee amount is negotiable; there is no standard rate. Typically, we have seen the fee’s range between 2% and 8% of the total purchase price. In most contracts, the option fee can also count towards the eventual purchase of the property.
Pay attention to the finer details.
Before agreeing to anything, you must be aware of the different types of rent to own contracts. A “Lease-option” contract will give you the right to buy the home when the lease expires but you are not obliged to purchase the home.
If you decide against buying the property at the end of the lease, you can walk free without any obligation to continue paying rent or to buy the property.
Lease purchase contracts are not as friendly and flexible as a lease option. It is common to be legally obligated to buy the property once the lease ends, regardless of if you can afford it, or if you are even still interested! To have the option to purchase without being obligated you need to be in a lease-option contract. The legal process is a hard one to decipher, because of this we recommend enlisting the help of a qualified real estate lawyer before signing or agreeing to anything.
Determine Your Purchase Price
Rent-to-own contracts should detail when and how the property’s purchase prices are determined. In some situations, the home seller will agree on a purchase price initially, when the contract is signed. Usually, this price is higher than the current market value.
It makes sense that buyers prefer to lock in the purchase price when they are operating in a market where house prices are rising.
Where does your rent go?
The question that can make or break your agreement: Will a portion of each payment be applied to the final purchase price?
As an example, say you pay $1,000 monthly in rent for three years, and you have agreed that 20% of that monthly rent counts towards purchasing the property. You’ll have $7,200 in rent credit.
($1,000 x 0.20 = $200; $200 x 36 months = $7,200)
Once again be sure you know what you are getting in to. Usually, rent is slightly higher than the going rate to make up for the rent credit you receive.
Purchasing the property
Everyone will have a different outcome once there contract ends, depending on what type of agreement you signed. If you have opted to have a lease-option deal and want to purchase the property, you’ll have to take out a mortgage or find other means of financing, to be able to pay the seller in full. On the other hand, if you don’t decide to purchase the home, or cannot come up with the financial means by the end of the contract. Once the option lease expires you move out of the property, just like you would with a standard rental. On the downside, you will likely have to forego any money contributed towards the house, but you won’t be committed to buying the home.
If you have a lease purchase contract, there’s a high chance that you are legally obligated to purchase the property when the lease comes to an end. Naturally, this can present you with a lot of problems, like not having the financial means to purchase the property. Lease option agreements are viewed as superior to lease purchase agreements due to the amount of flexibility they offer. Plus, you don’t risk legal battles for breaching the contract if you are unable to purchase the home at the end of the agreement.
Who Should Rent-to-Own?
Rent-to-own agreements are an excellent option for aspiring homeowners that don’t quite have the financial means to secure a home/mortgage. These agreements allow you to sort your finances out, boost your credit score, save money for a downpayment and secure the house you’d eventually like to own. If you do opt for the rent-to-own lease option, where a percentage of the rent total goes towards purchasing the home- you create equity for yourself.
Rent-to-own: Is it for me?
Don’t get caught up in the fact that you will be renting before you buy the home. SnapInspect suggests conducting the same due diligence checks you would do as if you were buying the property on the spot. After all, that’s the plan, isn’t it?
Here are a few key points to remember when entering a negotiation:
- Choose the right agreement (Lease-option)
- Hire a Profesional real estate lawyer/attorney
- Research the contract (deadlines etc.)
- Get a property Inspection
- Research the seller’s history
- Double check EVERYTHING (then check again)
SnapInspect believes rent-to-own agreements are great. They allow inspiring homeowners to move into a house immediately. You then are given several years (depending on your contract terms) to save for a downpayment before trying to take out a mortgage. And remember before you sign anything, consult a qualified professional.