Before entering into any rent-to-buy agreement, it is important to consider all extra expenses and not just the monthly rent amount. To do this you should prepare a budget sheet that will outline all of your income and expenditure and it may also be a good idea to use a mortgage calculator to get an idea of what repayments you may have to factor in in the future.
A rent-to-own option may be exactly what you need to get your foot on the property ladder. Qualified buyers are few and far between and financing is even scarcer, so many sellers are going the rent-to-buy route.
Whether they are called rent-to-own or lease-option properties, they are essentially the same. It’s a lease that is combined with a purchase option after so many years have passed.
There’s always an agreed-upon price and a specified amount of time, which usually amounts to more than three years. The renter pays regular rent plus any up-front fees that amount to 5% of the home’s purchase price.
The rent amount paid goes directly to the landlord (typically to pay the mortgage) and the additional payments are used for the home down payment.
A properly drafted lease-option agreement is an effective way of allowing most unqualified buyers the ability to purchase a home. Since agreements vary, it’s a good idea to calculate how much you can afford and take into account those up-front fees and extra costs.
Renting-to-own, like anything else, has its pros and cons.
With the option to purchase at the end of the arrangement, this gives the renters/potential buyers the chance to experience living in the home for an extended period of time.
They can see whether or not the home suits them and if the neighborhood is ideal for their situation. It’s basically a trial period of absolutely no commitment, which doesn’t come with purchasing a home outright.
One of the biggest advantages is the renter’s ability to improve their credit profile. Since money is being saved up for the down payment, an unqualified buyer in the beginning may be able to obtain a mortgage more easily once the lease agreement period is up.
But the disadvantages may be enough to keep people from trying rent-to-own. There’s always the chance you can lose your investment if you fall behind on the rent or become evicted. You end up losing any up-front fees and rent payment premiums meant to go toward the home buying.
There is also the chance you won’t qualify for a loan. Once the lease agreement period is up and you still can’t arrange financing, you end up losing all the money you invested.
You may be able to avoid this by spelling out a contingency clause in the lease agreement to have the fees and extra rent returned in the event you can’t find financing.
Doing a lease-option means that you lock in a set price on the home and with home prices falling, many buyers are hesitant to do that. In a volatile market where prices are up and down throughout any given year, you may be able to enter a renegotiation clause in the agreement, but that will be up to the seller’s discretion.
There is even the chance that the homeowner you enter into a lease-option agreement with will end up in foreclosure. If this is the case, the home will be repossessed prior to the end of the agreement, which leaves you without a home.