While rent-to-own transactions are most commonly conducted in the context of consumer goods obtained at a retail store, this type of transaction also describes a specialized real estate agreement. In a rent-to-own real estate agreement, the tenant has the option to purchase the real property at a fixed price within a specific period of time, usually one to three years. As part of the contract, the renter may be required to make a nonrefundable deposit. Occasionally, a portion of the monthly rent paid during the lease period is counted towards the down payment on the property, often in addition to the monthly rent as a monthly premium that sets the rent above the current market rate. If the tenant is unable to exercise the option to buy, the owner is then free to rent or sell the property to another buyer, or to restructure the contract. Rent-to-own real estate contracts typically become more frequently exercised during housing market downturns, such as the late 2000’s (decade) financial crisis. The primary components of a rent to own transaction are the rental term, the purchase price, the upfront deposit, and the monthly rent credit.
Terms of Lease
Rent To Own buyers and sellers enter into a lease agreement for a fixed period of time, typically 1 to 3 years. At the conclusion of the lease, the buyer will have the option to purchase the home from the seller.
The purchase price will be determined before the Rent To Own lease agreement is finalized and signed by both buyer and seller. This price is fixed and will not change after negotiated and agreed upon by both parties for the term of the lease. If buyer does not complete purchase, they can lose the agreed price.
The Seller may offer monthly rent credits. A “rent credit” is a portion of the monthly lease payment that is applied to the down payment if and when the Rent To Own purchase is executed at the end of the lease. The amount of the rent credit and the down payment will vary by each seller and property. Again, if the buyer does not complete purchase by end of contract, they can lose their purchase credit.
Rent To Own Advice.
Before entering into a rent to own transaction, tenant-buyers should consult with financial experts. A REALTOR® can develop an achievable roadmap to a successful loan approval and home purchase. Mortgage professionals can provide lending guidelines including minimum FICO score, maximum debt-to-income ratio and minimum required down-payment. With these objectives in mind, credit improvement consultants and financial advisors help you raise your credit score and build your savings.
Problems with rent to own
- As as buyer, if you do not purchase the home by the end of the contract you can lose your option fee you may have paid in order to enter the contract.
- As a seller, the buyer could back out of the transaction and you will have the property back again.
- As a buyer, you may be paying a rent premium above the market price that goes towards your down payment funds.
Advantages of rent to own
- Renters are able to save for the down payment towards the purchase of the home.
- Renters are able to purchase a home even with credit problems.
- Landlords can find tenants that enter the property with the intent to purchase and therefore will likely take good care of the property.
- Landlords may get a premium price for the monthly rent in order to offer down payment assistance.
- Landlords may be able to sell a property quicker even in a down market.
- Seller and buyer are able to lock in a sales price for the property when signing the lease and avoid market fluctuations in home values.
- Buyer/tenant can lock in the rental price of the property for the duration of the lease and will not need to be concerned with any rental rate increases during the term of the lease.