Considering a Rent-to-Own Agreement? Read the Fine Print!

Sometimes when home owners are struggling to sell a home, they may offer potential renters the option to rent-to-own. When would-be home owners are having a hard time qualifying for a mortgage, a rent-to-own may be an ideal situation.

But, what exactly does rent-to-own mean for renters, buyers and sellers? If it is as easy as it sounds, it could be an ideal option for everyone, right? However, rent-to-own agreements can be complex and confusing.

Here are the facts about renting… to own:

When buyers and sellers decide to enter into a rent-to-own agreement, they agree on a selling price, although the buyer “rents” the property for a period of time before buying. That period of time can range anywhere from two to quite a few years. What if the potential buyer decides the home is not right for them or they are unable to qualify for a mortgage when it comes time to buy?

Here, the renter has the advantage, because they are not obligated to buy the home. Often times, buyers put down a lump sum of money, called an “option fee,” which can act as the down payment on the house. Sometimes these fees are built into their monthly rent payments. If, at the end of the contract, they decide not to buy, the seller typically keeps that down payment or earnest money.

Renters may also have an advantage if the home’s value decreases or increases during the terms of their contract. If the home’s value decreases, they can either back out completely or try to renegotiate their deal. If the home’s value increases during the contract, renters have already locked in their price; so, they may be getting more home for their money.

Sellers, on the other hand, can also “win” from a rent-to-own agreement, especially if their home has been on the market for a while. Locking in a contract means they get a long-term renter who will take care of the house, because they ultimately plan to buy it.

While both buyers and sellers can benefit from entering into a rent-to-own agreement, both sides need to be careful that they structure the contract in their best interests. It is often recommended that buyers and sellers consult with an attorney or real estate agent before they sign a rent-to-own contract. There are also some other steps that buyers/renters and sellers should take:

Buyers:

• Meet with a mortgage lender, so you will know if you will be able to qualify for a mortgage and what it will take to do so. Proper planning is a must!
• Have a home appraisal and inspection completed before you agree on a fair selling price.
• Ensure the home is not in foreclosure or a short sale, before you sign the contract. Have the title reviewed to make sure you will be able to buy the home when your contract has ended.

Sellers:

• Review your future tenant’s credit to make sure they will be able to meet monthly payments and qualify for a mortgage when the contract ends.
• Protect yourself by asking for a security deposit.
• Ensure your right to evict if the tenant makes frequent late payments or misses payments altogether.

Together, buyers and sellers should decide who will be responsible for paying for things like home maintenance and repairs. You should also know how the current mortgage is being paid and who is paying the real estate tax.

The bottom line when it comes to a rent-to-own contract is that it is all about an agreement. Both buyers and sellers need to carefully examine and agree to the contract that binds them to the deal. If both sides agree, a rent-to-own can be a perfect home-buying situation for buyers and sellers!

For more information on rent-to-own agreements:

http://www.bankrate.com/finance/mortgages/rent-to-own-when-it-s-not-time-to-buy-2.aspx

http://realestate.msn.com/article.aspx?cp-documentid=17761848