Is Renting to Own An Option for You and Your Family?
“Rent-to-own” is a popular term that should be carefully considered. It can be an agreement between owner and seller to rent or lease a property until it is paid in full. The plan can work several different ways, some have zero deposits and no upfront fees, while others may have a large upfront deposits and lower monthly payments. It’s important that you spend time understanding the pros and cons of rent to own before signing a contract. Make sure you have a professional look at your contract before signing. A properly-constructed rent-to-own agreement can be an optimal solution for both a landlord and a tenant.
Benefits of Rent-to-Own Agreements for Tenants
A rent-to-own agreement could be a good choice for a tenant who wants to own a house and reap the benefits of home ownership but, due to bad credit or lack of capital (the typical 15-20% down payment required), does not qualify for a mortgage.
This type of arrangement allows a tenant to invest and build equity in a house while leaving open the option of walking away—for example, if the tenant’s financial situation changes for the worse, or the tenant simply no longer wishes to live in or purchase the house. While there may be serious financial consequences (if the tenant paid a hefty option fee or has paid a lot of rent money into an escrow account), the tenant is not legally obligated to purchase the house under rent-to-own agreements. A decision to forfeit the option will not result in foreclosure proceedings and will not impact the tenant’s credit history.
Landlord’s Pros and Cons of Rent-to-Own Agreements
Landlords may benefit from a rent-to-own arrangement as well. Landlords who want to sell their rental property, but are having difficulty doing so, may find a buyer through a rent-to-own arrangement. During the option period, the landlord enjoys a reliable, long-term tenant, and usually does not have to deal with the expense and cost of maintaining the rental property. Also, if the tenant does not exercise the option, the landlord retains the option fee and the funds set aside in escrow. Finally, landlords may also have various financial incentives for considering a rent-to-own agreement. For example, a landlord with a negative cash flow may find it advantageous to receive a small amount of cash now and regular income (in the form of higher-than-normal monthly rent), and tax advantages of this arrangement, as opposed to a lump sum payment from sale of the property.
On the other hand, rent-to-own agreements have some downsides for landlords. Because they are unilateral agreements, the landlord is contractually obligated to sell the house to the tenant, if the option is exercised. The tenant, however, is not contractually obligated to purchase the house. Instead, the tenant may choose whether or not to exercise the option. The landlord is therefore bound by the agreement and may not sell the house to a third party during the option period.
Understanding A Rent-To-Own Situation
A typical rent-to-own scenario allows tenants to rent a home for a specific period of time, usually a year. When this term is over, they have the option to purchase the home. All or a portion of the amount of money paid to rent is credited toward the sales price of the home. Some may offer a credit on closing costs too. Each situation is different.
A predetermined price is written into the agreement. Most landlords will require around three percent down for this kind of deal. The tenant is bound to the purchase price agreed upon at the end of the lease’s term. Consequently, the property owner cannot sell the property to anyone else while in agreement with the tenants.
Why These Arrangements Are So Attractive
Those who have bad, poor or no credit often look to these options as a way to own a home. Additionally, those who don’t have the money for a 20 percent down payment also see the charm in these types of scenarios. Getting a traditional mortgage is becoming increasingly difficult. If a person has experienced a foreclosure or slow payments on a mortgage, then the bank will likely say no to another mortgage for about 7-10 years.
Rent-to-own agreements can be both positive and negative. For some, it is the perfect way to get into a highly-desired neighborhood. Some areas with great school districts or close proximity to the downtown area may have less to choose from on the housing market. Some look at it as a way to own a home without being stuck in a 30-year mortgage.
The Pros and Cons of Renting To Own
From 1990 to the present, the city of San Diego, California, had more than 609,000 sales. Of those sales, only 782 were a lease option contract. These agreements are often filed in court for validity. The San Diego Association of Realtors knows about these agreements all too well. They also know about the pros and cons.
The main benefit to the buyer is that they can lock in a sales price on a great home. They can live in the home for an extended period and then make their decision. Some people move into a home and hate the neighborhood, neighbors, or the home itself. If you are signed into a 30-year mortgage, you can’t just move. However, if you are under a rent-to-own contract, then you can leave when the term is expired.
On the downside, the monthly rental payment will probably be a bit higher than usual. The convenience of the arrangement has a cost. The reason for the higher payment is that some of the money is going towards the purchase price. Unfortunately, the extra money will be forfeited if the deal is canceled. Oftentimes, in these agreements, the tenants are responsible for paying for maintenance, back taxes, and any upgrades. Under a “land contract” agreement, which is filed in the courts, things are a bit more difficult. If the renters don’t pay their payment, it doesn’t just mean an eviction, but it also means a foreclosure on their record.
Do These Rent-To-Own Deals Make Sense?
A Tenant in Buffalo, New York, told the local newspaper how his arrangement worked. After he had a heart attack, he was forced to retire. He signed a rent-to-own agreement with no extra fees and the option to buy after a year. The term stated that he must put down 10 percent. The rent was used to credit five percent on his down payment. For him, the situation worked out in his favor and he was able to purchase his home with little upfront money. For others, without a good credit score or knowledge of their credit score finding the right deal can be a bit more difficult. Finding real estate owners that are willing to take payments over a long period of are hard to find. Do your due dilligence and you will likely find a solution that fits you and your family.