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What is Rent to Own?

What is Rent to Own?

So, you want to be a homeowner, but don’t think you’re financially ready? Don’t feel helpless! Much like you can rent-to-own cars, furniture and appliances, you actually can rent-to-own a home!

Of course, you’re not going to find a rent-to-own option with every available house on the market, but you may find a seller who is willing to entertain this option, particularly if their home has been on the market for a while. But, how does a rent-to-own home contract work?

The biggest thing to keep in mind when entering a rent-to-own agreement is that every contract is different and each state may have different regulations for these types of contracts. It is vitally important to thoroughly read all the fine print. It also is wise to have a real estate attorney review the terms and explain anything that you may not easily understand before you sign on the dotted line.

With that being said, here is how a typical rent-to-own contract may work for buyers and sellers:

The Agreement

With a rent-to-own agreement, a potential homebuyer gets to move into their desired home right away with a number of years to work on improving their financial situation before applying for a home mortgage. A typical rent-to-own agreement lasts one to three years, so the potential buyer has that time period to boost their credit score and save money toward a down payment.

But, that doesn’t mean a buyer enters a rent-to-own agreement with no money down. Sellers often charge a one-time fee called option money that, in some ways, shows the renter’s good faith in buying the home at the end of contract. In addition to this “good faith” option fee, renters typically are legally bound within contract wording to purchase the home at the end of the contract period. Like no rent-to-own contract is the same, there is no set rate for option fees, but renters may expect to pay anywhere from three to seven percent of the home’s selling price.

Speaking of that purchase price, sellers and buyers who enter a rent-to-own contract decide when they’ll agree on the home’s price. Typically, they lock in a price at the beginning of the contract, but they may agree to do so once the contract expires. Either way, the timing of this decision is written into the contract.

The Rent

What about the rent that is included in a rent-to-own contract? Well, it’s usually paid on a typical monthly basis, but renters may expect to pay a bit of a higher fee than other renters in the same area. However, usually a portion of their monthly rental fee is applied to the home’s purchase price. So, unlike other renters, who are left with nothing after all of their monthly payments, renters who purchase their properties at the end of their leases already have made some payments on them!

Other things that buyers and sellers need to agree upon in a rent-to-own contract include who will be responsible for routine maintenance, like mowing and snow removal. They also need to consider possible repairs and certainly any renovations. Finally, if there are homeowner association fees, buyers and sellers need to determine which party is responsible for those fees during the lease. Essentially, home owners are responsible for property taxes and home insurance, but it always is wise for renters to carry an insurance policy to cover their personal property in the event of a loss.

The Purchase

Finally, for the “own” portion of rent-to-own contracts. By now, you’ve probably guessed that these contracts obligate the renter to purchase the home once the contract expires. So, at the end of the contract, the buyer applies for a mortgage and they head to closing. Sellers may even decide to deduct a portion of the option fees that the buyer put down at the beginning of the contract – but, sellers are not obligated to do so.

What happens if a renter decides not to – or is unable to – purchase the home at the end of their rent-to-own contract? You can bet that they’ll face ramifications. First of all, renters are sure to lose that option money and any rent premiums that were to go toward the purchase price of the home. In some instances, there even could be legal ramifications if a rent-to-own deal goes south!

So, that’s the good, bad and even ugly that can come along with a rent-to-own agreement.