A rent-to-own agreement is when the homebuyer first rent’s the seller’s house before going into a mortgage. The rent that is paid during the initial contract period typically goes fully or partially towards the purchase price of closing costs. These types of agreements are primarily common during slower real estate markets when homeowners are struggling to be able to sell their homes outright.
So there are a few aspects of rent-to-own agreements that you should know:
How Rent-to-Own WorksYou get a contract that spells out the terms in regards to who is responsible for what, the lease term, and other variables that come into play. Before entering this agreement but you should talk to a lender to see what qualifications you will need in order to get a mortgage down the line. With rent-to-own agreements the rental period can be up to 3 years but afterwards you are required to get a mortgage. If you don’t get a mortgage then you will lose money and potentially may face legal repercussions. That is why when speaking to a lender, you know what you need to do in order to for sure get approved for a mortgage.
What’s an Option Fee?Not every rent-to-own agreement is the same and some include an option fee. An option fee is where you typically pay between 2-7% of the purchase price to reserve the right to buy the house at a later date. The option money will either go to the purchase price or be forfeited if you don’t purchase the home.
What is a Lease PurchaseWhile some agreements have option fees, some have an agreement to purchase. This means that both the buyer and the seller have agreed on a purchase price for the home or agreed on an appraisal in the future. If you are in a rising market then getting a fixed price will mean that you get the lower rate opposed to later. However in pretty much any other market condition then getting an appraisal at the time of purchase means you don’t pay more than you are supposed to.
Who Will Handle Repairs?During the rental period, there is the question of who will take care of repairs. Some sellers will cover repairs and maintenance during the rental period while others make the future homebuyer responsible. It just depends on the contract which is why you need to read these agreements carefully and thoroughly!
Important to NoteUnlike normal repayments, for a majority of rent-to-own agreements if you miss 1 payment then you will lose your monthly rent credit that goes towards the house closing costs at the end of the rental period. However, even if you are on time with your payments, if your landlord isn’t paying the actual mortgage on the house then they run the risk of foreclosure which means you could get evicted even if you did everything right on your end.
BenefitsA huge benefit of rent-to-own agreements are the fact that they allow the potential homebuyer to see if they like the house that they will buy. They can do this while saving enough money for the down payment and building credit. The tenant is also able to build equity in the home each month even while in the rental period!
As a Seller What Should You Know?It is imperative that you choose a tenant that you trust to pay their rent. You should find out as much as possible about your future tenants and thoroughly review their credit report. Under contract, you have the right to collect first and last month’s rent as a deposit, and the right to evict the tenant if they are not paying rent.
What Happens at the End of the Lease?The tenant can either wait for the end of the lease or contract permitting can buy the home earlier if possible. If they decide to actually buy the house then you will need to work with a lender to get the mortgage to cover the remaining property price. If the tenant doesn’t buy the house and it is not legally obligated in the contract then the seller keeps all the rent and any fees that were given.
Overall, rent-to-own agreements are not for everyone but are definitely a good option to consider when trying to buy a home if you can’t do so the traditional way!