(DailyDig.com) – Between the rising cost of homes and the idea of securing a traditional mortgage to buy it, home ownership can sometimes feel like an unattainable dream. However, there are other financial avenues to explore when buying a home. Rent-to-own may be the right path to buying a dream home.
What is Rent-to-Own?
A rent-to-own agreement is one in which the tenant will rent the property for a specified amount of time, and they will have the option to buy the home before the lease expires. The rental period allows the tenant to ensure the home and neighborhood are a good fit for their family and lifestyle. It can also be an excellent way to build equity in a home they like before they are ready to take out a mortgage. The landlord can usually secure a quality tenant, and may even be able to lock in the purchase price in advance.
How Does a Rent-to-Own Arrangement Work?
At the beginning of a rent-to-own arrangement, the tenant will pay an “option” fee. This fee is a percentage of the purchase price but is negotiable. It is what gives the tenant the option to buy. The tenant will likely pay rent slightly higher than fair market value. However, that is because the extra amount is used as rent credits that will count as the down payment. This can save from having to pay a large sum at once, as it is spread out over the rental period.
Lease-Option Agreement
During the lease period of a lease-option agreement, the landlord cannot sell the house to anyone else. When the lease ends, the tenant has the option of buying the home. They can work with the homeowner to agree on the purchase price, which will usually involve an appraisal, which a certified appraiser completes to determine the home’s value. The lease-option agreement may specify that both parties can hire independent appraisers and what to do if the appraisers arrive at different home values. Typically, the option fee and the rent credits will reduce the final price. Of course, the tenant also has the option of not buying the home, but they will lose their option fee and rent credits.
Lease-Purchase Agreement
A lease-purchase agreement works similarly to a lease-option but comes with the obligation to purchase the home when the lease ends. Unless there is a contract breach or the buyer cannot successfully secure a mortgage, both parties are committed to the sale of the home. During the rental period, the tenant may often be responsible for repairs that would normally be a landlord’s responsibility. The tenant will always need to verify if they are responsible for other fees, such as taxes or homeowner association fees.
When is Rent-to-Own a Good Idea?
The Rent-to-own path may be a good idea for potential homeowners who:
- have good credit or can raise their credit score and clean up their credit history by the end of the lease term
- know they will be able to qualify for a mortgage
- want to pay down other debt while renting
- need to increase their employment history or otherwise need more time before securing a mortgage
A real-estate attorney should examine a rent-to-own contract. The potential buyer should ensure they understand and can meet the terms, just like any other contract. It is important to verify the deadlines, and understand how much of the option and rent payments are applied towards the purchase price, how to exercise the option to buy, and other important information before jumping in. However, a rent-to-own agreement may help non-traditional buyers achieve home ownership and should not be overlooked.
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