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Rent To Own Homes
If you’re like most Americans, then you believe that homeownership is the cornerstone of prosperity and achieving the American dream. However, for many Americans, homeownership can appear far out of reach.
Millions of Americans lack the credit rating to qualify for a traditional mortgage at a bank or other lender. Millions more people are carrying too much debt or lack the down payment or income required to qualify for loans as well. The coronavirus pandemic, with its impact on the economy, has likely made purchasing a home even more challenging for many people, too.
However, if you cannot qualify for a mortgage or use a traditional lender right now, all is not lost. In many cases, you may be able to purchase a home via a rent to own agreement. Here is what you need to know about rent to own homes, so you can determine if this is a good option for you.
What Are Rent to Own Homes?
A rent to own home arrangement is one in which a tenant enters an arrangement to purchase a home that he or she is currently renting, or is preparing to rent.
When dealing with a rent to own situation, the lease agreement that a tenant signs either contains an option for a tenant to buy the home or an obligation to purchase the house at some point in the future.
Additionally, some rent to own home options include stipulations that a portion of the rent paid constitutes a down payment for the home purchase at some point in the future as well.
The price of the home may be agreed upon upfront at the time of the lease signing, or the prospective seller/buyer may have a stipulation to reach an agreement on the price of the home at some point in the future.
In many cases, if the prospective buyer cannot secure a mortgage to buy the home within a designated time period, then he or she forfeits the purchase option and must move out of the home
There are some variations on the rent to own arrangement. One common type of home purchase transaction between prospective buyers and sellers is called a contract for deed.
When executing a contract for deed, the seller becomes a banker of sorts. The buyer agrees to make regular payments to the seller until the agreed-upon selling price is met in full or the buyer finds another way to refinance the property and pay the seller back.
In a contract for deed, the seller maintains legal title to the property until the balance is paid in full. Contracts for deeds are another good option for buyers who are unable to get a mortgage, or if the property needs improvements that preclude the buyer from obtaining a mortgage at the time of sale.
In the latter case, the buyer can make the improvements while in a contract for deed status, and then refinance the home with a conventional lender once the improvements are made.
In most cases, if a buyer defaults on payments or other terms of the transaction, the seller can repossess the property, and even charge the buyer rent until he or she vacates it.
Are There Fees Involved with Rent to Own Homes?
Although lease-options and lease-purchase contracts provide you with more time to save money, fix your credit score, and increase your income, these agreements are more expensive than renting an apartment with a traditional rental contract.
Here are three additional costs you’ll pay throughout the lease period of your rent-to-own agreement:
- A nonrefundable fee for entering the agreement, anywhere from one to ten percent of the purchase price.
- An additional leasing fee, which is a premium that applies to the future purchase price of the home and increases your rent payments.
- Maintenance and repair costs for upkeeping the property. The extent of these costs depends on your agreement with the homeowner (see also below).
You may also incur other fees when entering one of these agreements, including legal fees if you have to work with an attorney.
However, while rent to own arrangements are more expensive than a simple apartment rental, you may be able to avoid costs you’d face if you had simply gone and purchased a home outright using a traditional mortgage lender.
For example, you will not be required to pay for an appraisal or a home inspection, and you may avoid other mortgage fees as well.
How a Typical Rent to Own Agreement Works
While we have discussed variations on the transaction, most rent to own scenarios follow a similar trajectory. Typically, a renter and homeowner will enter into a rent to own agreement, either as a lease with an option to purchase or with an agreement to purchase the property in question.
The two parties will usually reach an accord on the purchase price in that agreement as well. The agreement will also define how long the rental period will be in most cases, which will help the buyer determine how much time he or she has to prepare to obtain a mortgage.
The prospective homebuyer will usually pay an option fee at this point. Both parties should ensure the agreement clarifies who is responsible for what types of maintenance on the property since everyone has a vested interest in maintaining it throughout the transaction.
As the buyer rents the property, a portion of the monthly rental payment will consist of a down payment on the property that accumulates over time.
As the rental time period closes, the buyer will then be responsible for obtaining a mortgage, or otherwise providing the balance due to the current homeowner.
Once the property has been refinanced, or the previous owner has been paid in full for the property, the rent to own transaction is concluded, and the renter becomes the homeowner.
The Pros and Cons of Renting-to-Own
As you can tell, fees make rent-to-own homes more expensive than simply renting a similar property in the same area. These fees become more costly if you decide not to purchase the property once your lease agreement expires, as they’re usually nonrefundable.
However, rent to own arrangements have several advantages and disadvantages that go far beyond the fees involved. Here are some pros and cons you should definitely consider before entering a rent-to-own agreement:
- If structured properly, you can use a rent to own arrangement to qualify for a home that you love without as many stringent up front requirements; you may even be able to obtain a home you otherwise wouldn’t have been able to with a traditional lender.
- In many cases you can gradually accumulate your down payment for a home while you are renting it to own.
- In some circumstances, such as a contract for deed, you may be able to make repairs to a home while living in it and get the property into the condition required to obtain a home loan from a bank or other lender.
- Depending on the lease contract, you can lose your option to buy the home if you’re late or miss one rent payment. This could lead to a significant loss of money and time on your part, with little recourse to recover it.
- Rent-to-own agreements usually set a purchase price that you will pay once the lease-option expires. This value can decrease as you carry out the lease agreement, meaning there’s a risk of buying a home for more than it’s worth.
- If the landlord or current owner has serious financial problems prior to completion of the transaction, the money you have invested in the home could be at risk to seizure or some other action by someone the landlord has financial obligations to.
How To Find Rent to Own Homes
Listings Near Me
Finding homes that you can rent to own is not that difficult. If you are working with a realtor on your home search, you could ask if there are any listings where the buyer would be willing to enter one of these transactions.
When you search home listings yourself online, sometimes you can also find properties that have been on the market for a long time where the owners are willing to enter a rent to own agreement.
Craigslist is another great resource for finding rent to own homes as well. Finally, there are some websites like iRenttoOwn and HousingList that, while they charge a subscription fee, specialize in rent to own homes, and are worth checking out.
Parting Thoughts: An Option Worth Considering
The rent-to-own process can be helpful if you are in love with a property but need more time to work on your finances, fix your credit score, and save money for a down payment.
It can also be a great way to “try out” a home and see if you truly like it before you fully commit to buying it, too. However, there are other costs and a variety of risks involved with the rent to own process that make it more costly than just a standard rental agreement.
In some cases, you might just be better off renting while working toward the goal of one day buying your very own home. So, when it comes to entering a rent to own agreement, check with a trusted financial advisor first, and see if rent to own is the best choice for you.
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