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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.
What is the Key to Rent-to-Own Home Agreements?
Choosing to go the rent-to-own way is certainly something that can be of great benefit to certain people. It all really depends on your specific financial situation. If you are someone who is eager to move into your own home but do not have quite enough to put a good down payment on it yet, then rent-to-own may be a good choice for you.
One of the top reasons this may a good choice for you is the fact that you are being presented with the ability to move into a house, which is what you originally wanted when you were first considering home purchases.
This is a more feasible way to go about living in a home than simply renting because you can make a real purchase on the home when your lease is up. Additionally, rent-to-own means that you are not losing all of your money to rent a property that you will never see again; in a sense, you are investing in that home.
Additionally, instead of having to save for years in order to get a down payment, you could be in the home quicker using the rent-to-own option. Overall, renting a home with the option to buy it later is so appealing because of the relatively low cost of entry, and because it can lead to a home purchase over time.
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.
Buying the Property
As mentioned above, when the lease term has been completed, there are options for you to go with. You can either get a mortgage to purchase the home or you can move out and go onto a new home. If you choose to move out, then you do forfeit the money that you put into this home, just as if you rent any other property.
In most cases, you are not obligated to purchase the home under one of these agreements. There are, however, instances in which the contract states that you have a legal obligation to purchase the home at the end of the lease. This is just another thing that you have to make sure you understand before you sign yourself into a deal.
Maintenance in Rent-to-Own Homes
This is a topic within the rent-to-own realm that has a lot of variables. The reason being is that there are going to be many different kinds of contracts that are presented depending on the terms your lender is going to require.
This means you are going to want to pay close attention when negotiating the contract. There are rent-to-own contracts that require you to cover any maintenance that the house needs under your term.
In many cases, you will not have to worry about this as the landlord is the one who typically covers any maintenance fees, but it is always a good idea to make sure. Maintaining a home can be pretty expensive and it is always better to try to have the landlord cover those expenses, however, every contract is going to be negotiated differently.
Another thing to note under the maintenance of the home would be to know what your landlord’s definition of maintenance is. It is very important to be on the same page because some landlords include mowing the lawn and cleaning the gutters as part of maintenance, while other landlords have a more narrow definition.
There happens to be a lot of grey area when it comes to maintenance in rent-to-own homes, so your job is to simply make it as clear as you possibly can. It is recommended that you go over all of the contracts with an attorney before you sign the lease agreement.
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.
Something that has been increasing in popularity in the real estate industry is rent-to-own services. There are companies that offer rent-to-own services that will work with you to purchase just about any house that you want under some sort of rent-to-own program.
This differs from a traditional rent-to-own situation because in a normal situation there is a landlord that is looking to put someone in a house that the landlord already owns. With these services, you can choose the home you’d like to move into, and then from there, the company will buy the house for you.
In most cases, after one of these companies purchases the home, you then enter into a contract for that home, move in, and pay the company monthly. That payment is typically a lease agreement that is stated at the beginning of the term, and you make that payment for the entirety of that term. Once the term is up, you are allowed to either purchase the home in full or move into a different home.
These companies can often provide potential homebuyers some great benefits. Working with them will give you increased equity in your home right off the bat. Some even offer a savings aspect that comes from your monthly payments.
With this savings aspect, you can put that percentage towards the home when the time comes to buy. There are even some services that will allow you to walk away with your accumulated savings should you decide not to purchase the house.
The idea of these services is to make a rent-to-own contract be geared more towards what the home buyer wants. You are not shopping in an inventory of houses that are already owned. Instead, you have the ability to go out and choose what you want to do. The contract is also geared in a way that is more contingent on having your best interest in mind.
There are many of these services out there, some are better to work with than others. With that being said, here are a couple of the best rent-to-own services.
Working with one of these companies could greatly benefit you if you are looking to move into a home and don’t quite have the down payment saved up.
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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