How Rent To Own Works

Buying a home through a rent-to-own or lease-option agreement has become more popular in the aftermath of the 2008 financial meltdown. More people have been looking at creative solutions to buying a home, but it’s important to differentiate between creative and smart.

Renting to own might be worth considering depending on your situation, but you need to carefully research and plan the agreement because there are a lot more potential pitfalls than there are in a traditional home purchase.

How Renting to Own Works.

These deals become more common when the market is slow for two reasons. First, a slow market makes it difficult for homeowners to sell their homes. Second, when the market is slow, more people struggle with low credit and saving up for a down payment. On the other hand, these deals aren’t as popular when the market is up. Rent-to-own agreements involve increased risks for both sellers and buyers, so sellers are less likely to bother with a rent-to-own agreement if they can just sell the house and be done with it.

Rent-to-own, sometimes called a lease option or lease purchase, is a self-imposed savings plan for the renter/buyer. The renter pays an upfront fee, called an option fee, which guarantees the renter the option to purchase the home after a specified amount of time, usually one to three years. The renter agrees to pay the fair market value monthly rent on the home plus a monthly rent credit. During this time, the homeowner can’t sell the home to someone else. The price of the home is fixed at the beginning of the period, and the renter gets it at the preset price — whether the value goes up or down. After the time period is up, the renter can put their upfront option fee and accumulated rent credit toward the purchase of the home. Nowadays, rent-to-own, lease option and lease purchase are often used interchangeably, but beware: In some agreements, the renter is obligated to buy the home, even if they can’t afford it.

Usually, the renter isn’t obligated to buy the home — just make sure you clarify that in the contract. If the renter chooses not to buy the home, the owner gets to keep whatever money the renter paid toward buying the home, including the upfront option fee and all monthly rent credits.

Advantages and Disadvantages for Renter/Buyer.

There are a lot of things to consider when entering a rent-to-own agreement. Some of the pros are:

• You can try out the home and the neighborhood before committing to the purchase.
• The price of the home is locked in (of course, this could also be a con).
• You can often buy the home early if you’ve saved up enough money before the lease period is up.
• If this is your dream home we’re talking about, you’ve got it guaranteed, even though you can’t afford it right now.

Before you start packing, though, here’s a couple cons to think about:

• The renter is almost always responsible for home maintenance and repairs.
• Most contracts stipulate that you lose your monthly rent credit if you’re even one day late on your rent that month.

Contract Tips

Now, whether you’re the renter/buyer or the seller, there are a number of things you need to figure out and plan for before you sign a contract, and it’s strongly recommended that each of you have a real estate lawyer help you draw up the agreement to make sure everything is legal and safe.

For the Renter or Buyer.

• As the potential buyer, you need to act like you’re planning on buying the home right away. Do a title search to make sure the deed is clean and the homeowner can actually transfer the title.
• Talk to a mortgage lender beforehand to make sure they will accept your option fee and rent credit as part of the down payment. Also find out what you’d need to qualify for the loan down the road, and get an appraisal and inspection.
• For you to get a mortgage on the home, the lender has to agree that the base rent was the fair market value and that the option fee you paid on top of it was actually extra — if the lender believes the fair market value was higher, then you won’t be able to use that “extra” money for the down payment. The fair market rent will be determined by an appraiser.
• Talk about who’s going to cover maintenance, repairs and home improvements.
• Find out how the seller plans to manage your option fee and rent credits while you’re renting.
• Confirm that the home’s mortgage, taxes and insurance are being paid on time.

If you’re having trouble building your credit or saving up for a down payment, a rent-to-own deal is probably worth thinking about. If you are looking for credible rent to own deals register here to receive listings that meet your budget.