Many Americans are looking for a way to get a home that works within their budget and lifestyle. It can be especially hard finding a home when the housing market favors those who have more money because they can easily outbid other potential buyers. That is why struggling homebuyers sometimes turn to rent-to-own opportunities instead. You may want to consider getting a rent-to-own if you are interested in buying a home eventually.
The name of this opportunity speaks for itself. When you get a rent-to-own property, you will first rent the house before you actually purchase it. All agreements vary but you can generally expect to rent for one to three years before you need to purchase the home at the price that was agreed upon during the setup. Just like any lease/mortgage there are costs that you need to be aware of as well.
Rent-to-Own properties also may be more expensive than picking a traditional setup. For example, if the price to rent the home would normally be $1,500 then those in a rent-to-own agreement would likely pay $1,700.
While it may feel like a disadvantage, it is actually the opposite. Even though these homes may be more expensive, it provides homebuyers the chance to get their finances in order whether it’s their credit standing, flow of income, or down payment.
Sellers can also benefit from a rent-to-own agreement as well! Generally sellers choose to offer this type of agreement if they are having a hard time getting rid of their home or if they don’t want to keep paying their mortgage.
How Does a Rent-to-Own Work?
There are two major parts of a rent-to-own agreement. These are:
- The rental period.
- The purchase.
Every agreement is unique so some contracts may be in the form of one document while others may separate the agreement out.
The Rental Period
Before you buy the home, you will need to finish the rental period. Even if your end goal is to purchase the property, the lease you have will work and act like a normal rental lease agreement. This means that the property still belongs to the landlord. Once the lease period is complete, that is when the “home buying” portion would initiate.
Your lease will go over the responsibilities of both the tenant and the landlord. You want to make sure you have a clear understanding of this portion before you sign any documentation. Due to the fact that this is a lease that is a part of a rent-to-own deal, you should get a rent-to-own professional to help you throughout the process. This ensures that both the tenant and the landlord are adequately protected.
Tenants will get an Option to Purchase document. This document gives tenants the ability to purchase the rental property within a specific time frame for a fee. The fee is referred to as the option fee. How the fee will be paid is based on the agreement terms which is why it is important for a rent-to-own professional to be involved in the process. You will typically see the fees paid upfront but others choose to pay it in the form of an increased rent which is then applied to the home. If the renter chooses not to purchase the home then the seller may be able to have a huge advantage. Depending on the agreement, sellers may not need to refund any extra money paid.
What’s the Difference Between a Normal Lease and the Rent Portion of a Rent-to-Own Lease Agreement?
A lot of people have questions when it comes to the lease part of a rent-to-own. That’s okay! There are some differences that are important to note like:
- The Payment Agreement
- Home Repairs
- Obligations of the Tenant
- Home Inspection
The Payment Agreement
Just like any other rental lease, you will need to make your rent payments on time (even though rent-to-own agreements usually have a bit more expensive rent prices). However, in a rent-to-own agreement, rent funds can be placed into an escrow account that can ultimately go towards the purchase price of the property. The landlord handles the management of this escrow account and if done properly the tenant may be able to build their equity during the lease agreement!
A huge benefit to a typical lease is the fact that a majority of the time, tenants are not responsible for home repairs. However, a rent-to-own property can be a little different. Instead, tenants will likely need to handle the cost of home repairs because the end goal is for the tenant to own the property.
Obligations of the Tenant
One thing that is similar between a typical lease and the rental period of a rent-to-own is the fact that there are tenant obligations in the lease. However, if a tenant decides to forfeit the lease in a rent-to-own agreement then they may be subject to forfeiting their option fee and any additional money paid to the landlord. Tenants could also face no reimbursement for the home repairs they paid for during their residency! This means there is more risk if this isn’t an agreement you want to continue.
Since the end goal is owning the home, you may benefit from getting a home inspection before signing the lease. This will ensure you will not be in for any surprises later. When you are proactive with your homeownership, you will be able to safeguard yourself from having to deal with major expenses down the road. Be mindful of which state you are in as well! There are some states that have real estate disclosure laws that require landlords to disclose any relevant information about the condition of the property. Again, this is why we recommend a rent-to-own professional to help you with the process.
Is a Rent-to-Own Right for You?
Maybe! What is right for you is based on your goals, current financial situation, and lifestyle. If you are considering getting this type of property then you should consider the benefits and drawbacks involved for not only the buyer but the seller as well.
Benefits for Buyers
Those that want to buy a home but need to improve their financial situation can benefit from this type of home agreement. During the rental period, typically 1 -3 years, people can focus their efforts on improving budgets, savings and credit score. Once it is time to buy the home, they will be in a better position to be able to afford that option. These agreements are also good if the tenant can build equity (a.k.a. ownership) during the rental period.
Benefits for Sellers
Buyers aren’t the only ones that can benefit from a nicely setup rent-to-own agreement. Sellers may also be able to benefit from a long-term tenant that deals with maintenance and repairs of the property, all while paying rent. This relieves a lot of financial burden from the seller and if the tenant decides not to purchase the property at the end of their lease terms then the seller can keep the money from the option fee and escrow account!
Drawbacks of a Rent-to-Own
Just like any agreement it is important to be aware of all aspects. Oftentimes drawbacks come from instances where people do not fully understand the agreement they are entering and have different expectations. However, there are also times where a rent-to-own agreement may not be the best option for you to consider.
For example, if at the end of the rent-to-own agreement, the tenant decides not to purchase the property then there could be some issues. The tenant basically paid extra money for no reason. Instead of getting a normal rental price, they paid a slightly inflated rate all while handling maintenance, home repairs, and the option fee. If the tenant decides not to purchase then they lose out on all of that money and just help the seller make a profit. You also need to keep in mind that every agreement is different. Some contracts may require the tenant to purchase the property and if they don’t, that could lead to even more issues.
Sellers also have some risk if they enter a rent-to-own agreement. If the renter ends up not purchasing the home then even though the seller got some money from the tenant, they still need to figure out a way to sell their home. If the seller was hoping to sell their property within a specific time frame then this can be even more of a downside.
Rent-to-own agreements can be a great opportunity for both the homebuyer and seller. However, these agreements can be complex which is why it is important to get the help from a rent-to-own professional for the process. Their help can make sure you fully understand the agreement that you enter into and ensure that no one gets the short end of the stick. Take the time to discover if rent-to-own is your path to homeownership!