How does Rent-to-Own Work?

How does Rent-to-Own Work? image 01
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The process of renting a house to eventually purchase it really works, but you should be aware of the loopholes that exist.

Choosing a rent-to-own scheme means that you do not have to front a down payment, thus it is a great opportunity for those who lack funds but want to become homeowners. However, most people still choose traditional ways of buying a house, and there are several arguments for that.

Very few properties are available for rent-to-own. Usually, you cannot find such offers on listings. But if you are lucky enough to find one and consider it the best option, below you can find some helpful information about this type of transaction.

What does Rent-to-Own mean?

A rent-to-own agreement is a bilateral arrangement between homeowner and tenant for selling the property for an agreed price within a specified period. Regularly, part of rent payments would be offset against the final sales price or closing costs associated with the transaction. Typically, rent-to-own contracts require tenants to rent the property for some time before the lease expires.

Types of rent-to-own agreements

There are two types of rent-to-own contracts: lease agreement with an option to purchase, and lease contract with a purchase agreement.

The first type of agreement provides for an option fee, a payment which secures the right of a tenant to purchase the property in the future. If the tenant pays it, the seller will be obligated to sell the property to the price exclusive of the sum of the option fee. If the tenant eventually changes his mind, the seller will retain the option fee. The sum of this payment is measured in percentage of the purchase price, regularly within the boundaries of 2 and 7 percent.

Lease contract with a purchase agreementinitially provides for a prospect sale transaction, and therefore consists of lease and purchase agreements. Regarding the final price, parties of the contract initially agree whether the price is going to be fixed or determined with appraisal and closing costs.

Our experts believe that this type of arrangement is more convenient as most real estate agents are used to working with it, and therefore understand it better than lease agreements with the option to purchase. In addition, with this agreement, all money paid is considered an advance payment, so is refundable in most circumstances just like any other conventional transactions.

However, the question of whether you should choose a fixed price or wait till appraisal arises. Given the framework of the growing market, choosing to pay a fixed price provides for a profit margin even before you have purchased the property. In any other circumstances, we advise you to consider the second option as you will minimize the risk of paying over the market value.

NB! If you have to fix your poor credit standing or if you do not enjoy financial stability, we highly recommend pushing for the closing date at least 12 months in the future.

Benefits of Rent-To-Own agreements

In order to dispel doubts about whether or not you throw money out of the window when paying monthly rent, let us reassure you that all your monthly payments are partially applied to the final price of the property. It only depends on the size of rent credits that you and the landlord agree on.

Let us suppose that the price of the property is $200,000, and the owner gives consent to apply 30% of your $1,500 monthly rent payment throughout your two-year lease agreement. This would decrease the final price to $189,800.

As for repairs and maintenance, rent-to-own agreements, unlike traditional rent arrangements, can impose responsibility for that on tenants. Therefore, you should clearly specify the obligations of both sides under the contract. As our practice has shown, the most common scenario is small repairs and regular upkeep to be the responsibility of the tenant, and large repairs to remain in the hands of the landlord.

Summing it all up, the rent-to-own agreement seems to be very beneficial for those who lack the finances for the down payment on one hand, and those sellers who want to avoid additional tax burden as property gains the status of investment.

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