Rent-To-Own Housing Options
Rent-to-Own arrangements allow tenants to put a portion of their rent toward an eventual purchase of the property they live in, building equity without the need for a large down payment. Here's how they work, and what you should look for.
Rent-to-own housing is not a new concept. Years ago it was a common way to purchase real estate, though its popularity waned during the years of easy mortgages. As mortgage criteria tighten and conventional loans become harder to get, rent-to-own arrangements are coming back into fashion. Rent-to-own arrangements allow tenants to buy without a large down payment, and many sellers would prefer a rent-to-own option to allowing a house to sit empty.
What Is It?
Also called leasing to own, the process is similar to that of a car lease. Renters agree to pay a set amount to the owner for each month they live in the house. At the end of a set period (average is three years) the renters have the option of buying the home. The rent payments are like income for the seller, and a portion of the payments can go towards a down payment for the buyer.
How it Works
There are certain steps one must take when purchasing a home via this option.
1) Agreed Purchase Price
: When a buyer moves into a home purchased via the lease option, the buyer and the seller MUST agree on the sale price of the home.
2) Other Buyers Locked Out
: The buyer typically pays the seller a fee. This fee prevents the seller from selling the home or from offering to rent the home to another potential buyer.
: Once the above situations are taken care of, the buyer then occupies the residence as a renter. The period of time is agreed upon between buyer and seller and typically lasts anywhere from one to three years.
4) Credit builds towards purchase
: A portion of rent payments is applied to the purchase price of the home. An example: rent is $1500 a month, $750 of each payment is designated as an option credit. Over 24 months the buyer will have accumulated an $18,000 down payment.
The benefits are numerous to both the buyer and the seller. For buyers, rent-to-own arrangements allow time to arrange for a mortgage qualification and build up a down payment. Those who need to improve their credit score before obtaining a mortgage can take advantage of renting their home, while developing a consistent payment history. It also gives time to pay down debt, participate in credit counseling, and rebuild credit scores.
Repairs made while living in a rent-to-own home can be taken off of the purchase price. This "sweat equity" can save thousands of dollars. Buyers also have the ability to "try out" a home and neighborhood before purchasing. It makes sense, after all, when considering that most people only own 1 or 2 homes in their lifetime.
Sellers can benefit by being able to maintain cash flow during the leasing period. Individuals who have already bought another home have the relief of not making two mortgage payments, and ultimately knowing their home will be sold. Sellers are also relieved from making small repairs and home maintenance on a home that they are not living in. The home is also not sitting empty while waiting to be officially sold. This means less worry regarding break-ins and vandalism.
Important Things to Keep in Mind
Before agreeing to a rent-to-own arrangement, or trying to sell your home via this option, there are a few things to keep in mind.
Paperwork is vital! Be sure to have a rental agreement drawn up. This will outline the terms of your agreement while renting the property. The following documents will need to be drawn up and taken care of as well:
- This will identify the time period the buyer has and the purchase option fee.
- This will specifically spell out the purchase price and terms of the sale.
All paperwork should be done legally. This will require a contract, a notary, and legal fees.
Rent-to-own housing can be flexible and each agreement will vary. Agreements can be written to accommodate the specific needs of both the buyer and the seller. It's an option for those who are looking to sell their home quickly, but may not have a buyer ready to purchase. It is also an option for those who want to buy, but aren't there yet financially. Consider the pros and the cons and consult with a real estate professional. It may be an option for you and your family.
Rent-To-Own Listings Services
There are a number of services that exist that claim to have exclusive rent-to-own and lease-to-own housing opportunities.