Rent-to-Own, a non-traditional route to homeownership followed in different countries across the globe. So, are you curious to gather more insights on it? Let’s reveal everything you need to know about rent-to-own properties.
What are Rent-to-Own Properties?
As the name itself implies, you rent a property to own it at a later date. Let’s simplify it a bit. You rent a home for a particular period with a motive of buying it at the end of your lease term. That’s how it starts! A part of your rent goes towards the eventual down payment of the house.
Now, that portion of the rent is laying a strong foundation for your own home. And, you are not merely throwing away money, but contributing towards building equity in the home.
Why Seller Will Consider Rent-To-Own?
First of all, any seller can consider this scenario if a property has been sitting for sale for a long time. Instead of having to pay for all the expenses and mortgage for an empty home, it would be a smart idea to lock your investment up with somebody who is willing to buy a property but can’t afford it right away.
There are also investors who buy properties with intent to rent it for the higher price with these Rent-To-Own possibilities. Investors will have a locked purchase price which will secure their money no matter what happens with real estate in general.
Rent-to-Own: How it Works?
Before you start your home search, check this website to see if you can qualify for a stationary mortgage. If you find out that you can’t qualify with the reason being a bruised credit score or you don’t have enough funds stored for a heavy down payment or simply want to buy a house which you rent right now; still, if you are planning to buy a house, a rent-to-own home could be a possible and practical alternative.
However, before doing that, there are a few points you must keep in mind.
A Formal Contract
The process of a rent-to-own home typically initiates with a written and signed contract. This contract usually lasts for 1 to 5 years and could be in any of these two forms, as mutually decided between the parties:
- Lease-Option Contract: You have the first right, but you don’t have the obligation to buy the home. The seller simply gives you an option to purchase it at the end of your contract term. If you wish to skip the purchase or can’t afford it, you can easily walk away. Of course, any money paid over and above the rent plus the equity you built gets lost.
- Lease-Purchase Contract: Under this, you are legally obligated to buy the property, once the lease expires irrespective of whether you can afford it or not. This contract is usually set out is commitment, so be cautious and extra sure here since you don’t have a choice, but are bound to purchase the house.
Ultimately, if you prefer to play safe, a lease option contract sounds better and more meaningful.
Set Home Purchase Price
Sellers prefer to lock-in the future purchase price of the house at a rate higher than the current market value. However, some may agree to determine it when the lease term runs out, and mainly at the future appraised value of the house.
How much does it cost? Initial Fee
Tenants have to pay a one-time upfront fee (usually called the option money) to the present owner. And, remember this initial fee is generally non-refundable. Also, there isn’t any standard rate, and it can vary from 2.5% to 7% of the purchase price.
After all, the seller has given you the right to buy the property. Therefore, he has to ensure that you stay motivated for it.
What Are Rent-to-Own Pros and Cons?
A Rent-to-own deal could be a win-win situation for both parties. Let’s peep into some of its benefits and drawbacks.
For Landlord (Seller)
- Having trouble selling your property? Rent-to-own could help you find an interested buyer.
- Want to avoid paying a double mortgage? (If you have bought another house): Giving an option to purchase does make sense.
- Finally, savings on maintenance – a long term tenant taking care of your property lowers the risk even if the deal doesn’t materialize.
- If your city’s real estate market changed and now booming, then your investment can end up being a bad deal given the fact that you can’t get out of the contract once signed.
For Tenant (Buyer)
- Do you have a low credit score? You’ll get more time to boost it or build it from scratch.
- You have a low income and insufficient reserves: Rent-to-own is at your rescue!
- A chunk of rent gets credited towards the mortgage down payment. A big sigh of relief for the aspiring homeowner!
- You will also have a privilege to live in a home today that you will own one day without having a hassle of moving from one place to another.
You’ll be also responsible for maintenance and repairs, unlike regular tenants. That hardly matters if you are firm in your buying decision. Be prepared that at the end of your term, you may have to pay around 20% more than the normal rental cost. This may be slightly pinching! Also take into consideration the fact that home prices can start falling or stagnate, this will make your locked purchase price above market value, and you might end up getting an overpriced piece of real estate.
The Fine Print
Not everyone has the luxury to buy a home. There could be various financial and personal constraints hitting your investment decisions. Hence, rent-to-own can prove to be a smart move for some, while not for others.
If all goes well during the lease period, you can repair your credit and qualify to secure a handsome amount of mortgage. And, also become the proud owner of the house!
Unfortunately, if things don’t go as planned, the scenario can be pretty different. Therefore, while choosing the rent-to-own path, keep your eyes wide open and don’t get stuck with something you can’t fulfill.
Is rent-to-own the only solution if you can’t afford a down payment or a mortgage? The answers may vary as per individual circumstances.