How Does Renting to Own Work?

Share on facebook
Share on twitter
Share on linkedin
Share on email

The Rent to Own Guide

Are you wondering how rent to own works? Maybe a friend or relative mentioned it to you as a potential housing opportunity? If you aren’t currently in a great financial position to get a mortgage, rent to own homes can seem like an ideal solution. It gives you a way to own a home even if you don’t have a down payment ready.

Rent to own gives you the option of buying the home you are renting after a certain time. The money you pay to the landlord will include the rent and some of the money going towards the down payment for the property. This can let you boost your credit score while helping your purchase.

The challenge will be finding a rent to own home.

Finding a Rent to Own Home

It is more difficult finding rent to own homes than an ordinary purchase or rental. You might need to find an owner who has a property that has been on the market for a very long time. Since they have had trouble selling the home, they may be happy to choose the rent to own option.

If you find this situation, you can approach the seller to see if they are interested in this type of agreement.

Rent to own can be an option for a tenant if they don’t want to move, but the landlord wants to sell. The tenant could ask the landlord to set up such an arrangement.

If you are already in a rental home, you can ask the landlord if they are willing to sell the home to you through this type of agreement.

How Does Renting to Own Work?

There are some stages involved in renting to own; let’s review how this works.

Signing a Rent to Own Agreement

You can expect to have to sign one of two possible legal agreements.

You could have a lease with the option to purchase. This will give you the chance to purchase the home when the lease ends. However, you aren’t committed to the purchase and can walk away from the option if you choose.

There is also a lease with a purchase agreement tied to it. This will mean that you are legally required to purchase the home at the end of the lease. If you are entering into such an agreement, you really need to be sure that it is right for you. You also have to make sure that the home is a good condition so that you don’t get hit with unexpected costs.

There are pros and cons to both you and the owner with a lease with a purchase agreement. Understanding which party it’s going to benefit most will be tied to the real estate market’s performance from the time you take possession of the home until when the purchase agreement is executed.

If real estate values go up significantly, and the purchase price was agreed to at the time of the lease, the buyer will really make out well. The exact opposite will be the case if the real estate market values tank.

Setting the Price in Rent to Own Contracts

Whichever agreement you enter into, you will have to agree to the price at the start. However, this can be a larger problem than with a normal home purchase. A real estate agent isn’t going to be involved in the negotiations, so you are on your own when agreeing to the price.

You should check the prices of similar homes that have sold to find the right price. This should be done before you begin to negotiate with the landlord, and it might be a good idea to have the home inspected at this time. You will want to avoid overpaying for the property and at the same time need to know you’re not buying a lemon.

A home inspection is a critical aspect of any real estate purchase contract.

Understand The Rental Term

When the lease agreement ends, you need to be in a good financial position to buy the home. An agreement like this will typically last between one and three years, and the rental term should be right for you to make sure you can get a mortgage when you need it.

Watch For Extra Fees With Rent to Own

An option fee could be included that is non-refundable. This could be between 1% and 5% of the agreed purchase price and gives you the option to buy the home.

Your monthly payments will be higher than normal rent costs. This is because some of the money you pay will be going towards the purchase of the home. This extra cost could be as much as 25% more than typical rent, although that is highly unusual.

Typically, the amount you pay in rent to own contracts won’t be substantially different than the going rate for a traditional lease.

Know How Maintenance is Handled

When you are renting a home, maintenance is the responsibility of the landlord. Under a rent to buy agreement, this might not be as clear. It will be in your interest to make sure the home is well maintained, so the maintenance responsibilities should be stated in the agreement.

If you are required to take care of the property, there should be specific language that spells out exactly what you’re required to do.

Applying for a Mortgage

When you are nearing the end of the lease agreement, you need to apply for a mortgage. Getting preapproved for a mortgage will be one of your top priorities.

Hopefully, your finances will be good enough to find a lender that will loan you the purchase amount. If things go well, you will be the proud owner of the home you have been renting.

Get Your Credit Scores Up!

While you may be able to get preapproved for a mortgage, you’ll want to make sure you get the best possible loan terms and conditions. Borrowers who have good credit scores get the best interest rates from lenders. If you have decent credit but know you could see improvement, you might want to try a credit improvement service.

One such company that offers credit tools is Credit Karma. Credit Karma is a great service for first time home buyers to improve their credit standing. The service is free, so it is well worth your time.

Where to Find Rent to Own Homes

Now that you’re ready to enter a rent-to-own contract, you’re probably wondering how to find them. Well, it isn’t all that easy, but here are a few suggestions from Bill Gassett, owner of Maximum Real Estate Exposure:

  • Find companies that specialize in rent to own properties or do a lot of homes for rent.
  • Use foreclosure.com or Realtytrac.com. These sites provide information about owners who have run into financial problems. A percentage of these owners will be desperate to get their properties filled with a tenant to stop the financial pain.
  • Find a top local real estate agent. Top-shelf local real estate agents will often hear about rent to own houses before get listed.
  • Call home sellers. If it is a buyer’s real estate market and a house has been languishing on the market unsold for a while, some owners might want to get it rented with the opportunity to sell in the future.

Final Thoughts on Renting to Own

Rent to own contracts are like any other legal agreement. You will be required to fulfill your obligations in the contract. It makes sense to have an attorney in your corner who looks over the contract before you sign. The chance of signing something that could put you on the hook financially for years to come is worth avoiding.

An attorney fee is small potatoes considering the problems you’ll have if you sign a contract that has language extremely favorable to the owner. Hopefully, you have found this guide to renting to own homes useful.

 

About the author: The above article on how renting to own works was written by Bill Gassett. Bill loves to share his expertise with buyers, sellers, and real estate agents alike.