What is a Rent To Own Transaction?
Rent to own contracts typically become more popular during housing market downturns as property sellers may need to vacate the property before it can sold, and landlords may use them as a way to find good tenants. The seller may attract the tenant by having a specified portion of the rent applied as a credit toward a down payment on the house, or may receive a bulk sum of money for the option giving the tenant time to rebuild their credit if necessary. A rent to own transaction is when a landlord agrees to lease a home to a tenant and the tenant has an option to buy the home for a pre-negotiated price before the end of the lease. The primary components of a rent to own transaction are the rental term, the purchase price, the upfront deposit, and the monthly rent credit.
Terms of Lease.
Rent To Own buyers and sellers enter into a lease agreement for a fixed period of up to 36months. At the conclusion of the lease, the buyer will have the option to purchase the home from the seller.
The purchase price will be determined before the Rent To Own lease agreement is finalized and signed by both buyer and seller. This price is fixed and will not change after negotiated and agreed upon by both parties.
In addition to the down payment credit, the Seller may offer monthly rent credits. A “rent credit” is a portion of the monthly lease payment that is applied to the overall purchase price if and when the Rent To Own purchase is executed at the end of the lease. The amount of the rent credit and the down payment will vary by each seller and property.
Rent To Own Advice.
Before entering into a rent to own transaction, tenant-buyers should consult with financial experts and a REALTOR® to develop an achievable roadmap to a successful loan approval and home purchase. Mortgage professionals can provide lending guidelines including minimum FICO score, maximum debt-to-income ratio and minimum required down-payment. With these objectives in mind, if necessary, credit improvement consultants and financial advisors can help you to raise your credit score and build up your savings.
Problems with rent to own
As a buyer, if you choose not to buy the home you could lose some or all of the option fee
As a seller, the buyer could back out of the transaction and not buy the home
As a buyer, a rent increment might be put on top of the typical lease payment to cover the portion going towards the down payment.
Advantages of rent to own
Renters are able to put money towards the purchase of their home
Renters are able to overcome possible poor credit situations
Can help landlords find tenants in a down market and secure a good return on their investment
Seller/landlords can begin to dispose of a property which no longer meets their property ownership requirements.
Tenant/Buyers are able to 'lock-in' the sale price of the property when signing the agreement and enjoy the benefits of potential appreciating market values over the term of the contract upon exercising the option.
The monthly rental repayments may be fixed for the full term of the contract so rental rate increases will not affect the renter/buyer.
Please contact us with any additional questions or if you have a home you would like to rent to own.