The Thing About Rent To Own
This is a legally documented transaction agreement a buyer has with the owner of the house to pay monthly rent for a predetermined amount of time say 1-5 years, the tenant pays an option fee usually known as option money. For example, if a house were to normally rent for 700k/month, a rent to own tenant would pay #1m which the sum of 300k will be credited to the tenant for eventual down payment. This agreement qualifies the buyer who isn’t quite ready financially, the opportunity to improve his credit score and to start saving money for a down payment when done right. It is worth considering especially when an aspired buyer can’t wrangle into purchasing a mortgage loan to own his dream home. Rent to own becomes an investment as the money goes into the landlord’s pocket, to pay the mortgage on the home, to supplement his or her home and does nothing more for the rent. With the rent to own houses, a portion of the rent money goes towards the purchase of the home, making it an easier way for most renters to invest in a home. There are types of potential buyers who apply for this rent to own method: the ones who are unable to qualify for a mortgage loan and the ones who are tired of renting and want to take a positive step. When signing a rent to own agreement, your monthly payment consists of two things; firstly, the amount of money you would usually pay if you were renting the property and secondly, an additional payment each month that goes towards your down payment until you are ready to buy the house.
There are two different types of leases in a rent to own agreement;
- Lease Option: This gives you the choice to buy the home or not by the end of the lease. You are not legally required to purchase the home; however, if you choose not to purchase the home, you will forfeit any money you paid towards the purchase during the lease.
- Lease-Purchase: This is the legally obligated rights to buy the home by the end of the lease.
Before signing a rent to own agreement make sure to understand the contract agreement or you inform the lender to clarify you on the terms and conditions involved.
PROS AND CONS OF A BUYER
- Buyers have the time to build income and repair their credit scores.
- In a rent to own agreement, the seller is fully responsible for taxes attached to the home during the period of rent until the balance is paid in full and the ownership transferred to the buyer.
- If the home doesn’t appeal to you, you need not have to buy it as the flexible attribute of rent to own contract is a desirable option, you get some time to test the home before you make up your mind to purchase it or leave it at the end of the agreement.
- This offers you the flexibility to choose your perfect home, in case the market price of the home goes high while you are renting, you can look forward to buying the home when the price falls and stabilize.
- Equity builds faster in rent to own situation because the appreciation happens faster compared to the average mortgage.
- If the renter fails to pay the original mortgage on the house, it may be foreclosed and the buyer is being forced to move.
- In case of breaching or violating the rent to own contract, you run the risk of getting evicted from the house as per contractual terms and all your rent to own money will be forfeited.
- Buying a home at a reasonably affordable price at later on, owing to a probable decrease in the property, you will experience a disappointment as you are legally bound to pay only the per decided amount during the contractual period.
PROS AND CONS OF A SELLER
- Rent to own option expands the pool of potential buyers by creating an opportunity for people who may not qualify for a mortgage loan at the moment.
- Sellers may be able to ask for a higher sale of price and can potentially earn an income.
- There is no certainty for the seller that his home might be purchased using a lease option agreement at the end. Even when they have to keep the extra money off the buyer paid towards the purchase price, the seller will have to start the process all over again.
- The seller may face losing cash on the deal if the purchase agreement locks in a sale price at the beginning of the lease and home values go high, they may end up selling the home for less than what it’s worth.