Rent to own deals look and feel very similar to regular home sale deals but with a little twist. Both buyers and sellers can benefit from these deals under right conditions.
Rent to own deals are a little more complex in comparison, hence it’s always a good idea to get properly informed before engaging into signing a contract.
In this article we cover rent to own transactions involving a home but there exist other types of such agreements.
So, what is this rent to own? Essentially, it is a way to buy or sell something, in this case a property, over time instead of immediately. It’s an agreement in which you rent a house for a certain period of time with an option to buy it. Such agreements consist of two parts: a standard rent agreement and an option to buy. Below we cover important things one should know before getting involved in rent to own agreements.
Who are the best candidates for such agreements?
Rent to own agreements are attractive to buyers who are not in a position at the moment to afford a house but expect to improve their financial situation in the following years.
Buyers who do not qualify for a house loan can start by buying a property through the rent to own agreement while working on rebuilding their financial situation and improving their credit scores together with saving money for a down payment.
Advantages of the rent to own for the buyers
- Lock in the purchase price. House prices increase every day and it is often a good option to buy a house at today’s price (even if the actual buying transaction is going to happen a few years into the future). The buyer has an option to back out of the deal if the house market crashes but whether or not it is a good financial decision will depend on how much money the buyer paid upfront.
- Build equity. When you rent, you do not build an equity in the same way as a homeowner would do. But, with the rent to own agreement payments accumulate and can provide a substantial amount to put towards one’s future home. Buyers can also save money by opening a savings account instead, thus avoiding the pitfalls of rent to own agreements and providing a possibility to buy any house.
- Try it out. Buyers can see what it means to own a property and get to know the house they intend to buy in the future. This allows detecting problems like defect plumbing, leaking roof or terrible neighbors before it is too late.
- Move less. Buyers who are happy with the house they’re currently renting with the rent to own agreement avoid the inconvenience of moving again in a few years when the time for buying a house has arrived.
Advantages of rent to own for sellers
- Earn additional income. If a seller doesn’t need to sell immediately to, for example, finance their next home buy, they can earn additional income while waiting to sell the property.
- Higher price. Sellers can ask for a higher price when offering their home as a rent to own. They are providing an opportunity to those renters who might not be in a financial position to buy a house. Also, potential buyers have an option to buy the house which they might never use, and flexibility always costs extra.
- Attract more buyers. If a seller needs to attract more buyers, they can offer their property as a rent to own. Not everyone qualifies for a loan but there’re many people who would like an option to buy in a near future, so rent to own might be a solution that would suit many.
- Committed renter. A potential buyer is more likely to take care of the property and get along with the neighbours than someone who knows it’s just a rent and they will not stay there forever.
How does it work?
- Good advice will go a long way. Be sure to review your contract with the real estate attorney. Rent to own deals can be complex and there are scams taking advantage of people who do not qualify for a loan but have high hopes to buy in the near future. Even with an honest seller, it’s possible that not everything goes as planned, hence getting a proper advice is vital with these types of deals.
- Negotiate terms and conditions. Just like with buying a home, a rent to own deal starts with a contract. Both buyer and seller agree to certain terms that suit their respective needs. Depending on what is important to you (and, whether you are a buyer or a seller), it’s possible to request certain features before signing an agreement. For example, buyers can request larger or smaller up-front payment if that is going to be helpful to them.
- Fixed purchase price. The purchase price is agreed upon in the contract. A buyer can purchase the property at that price in some point in the future (usually between 1 and 5 years depending on negotiations) – no matter what the home is actually worth at that point. When setting the price, sellers often set the price that is higher than the average. Why? They provide flexibility and need to cover for the possibility that the buyer might not buy the property. If the property goes up in price during that period, the buyer made a good deal.
- Buying is optional. At the start of any rent to own transaction, the buyer pays the seller an option premium. This is often around 5% of the purchase price but it can be higher or lower depending on what was negotiated. This payment gives the buyer the option, but not an obligation, to buy the property in the future.
- No refunds. The option premium is not refundable, but it can be put towards the ultimate house price should the buyer decide to buy the house. Larger than 5% option deals can be risky for buyers as should the deal not go through for whatever reason, they will never see the money back. This is why good advice is essential.
- Monthly payments. The potential buyer will be making monthly payments to the seller that serve as rent but will often pay a little extra each month. That extra money is usually credited towards the agreed purchase price, which means the buyer will need to come up with less money at the moment of the purchase. These extra payments are also not refundable and serve as a compensation to the seller as they cannot sell the property to anyone else during the rental period and there’s no guarantee the renter will actually buy the place.
- Maintenance. Whether we like it or not, a house needs to be maintained. But who is responsible for paying for the repairs within the rent to own agreement? If you are considering getting into such a deal, make sure this is clearly stated in your contract. It is common practice to say that everything that falls below a certain amount, say $500, is the responsibility of the buyer, however it is wise to get informed about local laws as owners are often required to provide certain amenities or pay for certain types of repairs.
As with any agreement, there are advantages and disadvantages. If you are considering a rent to own agreement, make sure you get informed well and have your contract checked by the real estate attorney. This is the best piece of advice we can give you and wish you luck in your journey to buying or selling a property!