A rent-to-own purchase option is a possible path to home ownership for a buyer who does not currently have enough money for a down payment but will in the next couple of years, or for a buyer who has credit issues that will clear up in the same time frame. However, buyer beware!
There are two different types of rent-to-own agreements: a lease option agreement and a lease purchase agreement. Rent-to-own works much differently than the traditional Home Buying Process. With a lease option agreement, you have the option of purchasing the home after the agreed-upon time period. However, if you go with a lease purchase agreement, you are legally obligated to buy the house.
In most rent-to-own contracts, a portion of each rental payment is credited toward the home purchase. As a result, you will often pay a higher rent payment. The accrued rental credits and maybe the initial deposit will be a partial down payment on the home if the renter exercises the purchase option. If the renter decides not to purchase the home, this deposit money is forfeited and kept by the homeowner. To exercise the purchase option and complete the sale, the buyer will need funding, usually through a traditional mortgage. The renter/buyer must have the ability at some point during the lease term to qualify for a mortgage or find an alternate source of funding.
Rent-to-own real estate contracts are not standardized or regulated. The renter should understand all of the specifics of the contract concerning timely rent payments and how to exercise the purchase option. That being said, it would be wise to have an attorney review the contract before it is signed.
Elements of a Rent-to-Own Agreement
· Purchase price: how and when the purchase price will be decided.
· Rent payments: Amount of the monthly rent payment/late fees and a percentage of each payment set aside as a credit for your future purchase.
· Maintenance: the seller will typically ask that the renter pay all repairs, maintenance, HOA fees and property taxes.
· Option Money: The renter is required to pay the seller a one-time, nonrefundable option fee.
· Lease term: If the lease term ends and the renter decides not to move forward with the purchase or is unable to qualify, the option to purchase expires at the end of the lease term.
· Closing costs: A percentage of the rent payments, agreed upon in the contract, that will apply to the down payment and closing costs.
· Default Clause: The language in the contract that defines how the buyer can default on the rent-to-own agreement and lose their option deposit and equity.
Benefits for Buyers
· Build a down payment over time.
· Avoid buyer competition.
· You don’t have to qualify for a mortgage right away.
Cons for Buyers
· Rent will be more expensive.
· You’ll pay nonrefundable option money.
· You will probably be responsible for repairs and maintenance.
· Home values could go down.
· The buyer will pay more for the home.
· Contracts favor the sellers.
For buyers, there are more disadvantages than advantages to a rent-to-own agreement. Lease options and owner financing involve a lot more risk to the buyer than traditional transactions. If possible, it’s better to wait until you are able to purchase a home the traditional way.
If you have questions about rent-to-own options or you are looking to buy or sell a home, feel free to contact one of our agents at Right Size realty.
Rodney McCoy | 601.383.1019 | rmccoy@rightsizerealty.com
Jamie McCoy | 601.259.0461 | jmccoy@rightsizerealty.com
Andrew Tyre | 601.842.4270 | atyre@rightsizerealty.com
Allen Wilson | 601.985.9231 | awilson@rightsizerealty.com
Paul Tyre | 601.709.9002 | ptyre@rightsizerealty.com
Dianne Nelson | 601.421.7094 | dnelson@rightsizerealty.com
References:
Braverman, B. (September 3, 2019). 6 Questions to ask about a lease-option to buy a home. Bankrate. Retrieved from: https://www.bankrate.com/real-estate/questions-to-ask-about-a-lease-to-buy-option/
Ramsey, D. (2020). How Does Rent-to-Own Work? Retrieved from: https://www.daveramsey.com/blog/how-does-rent-to-own-work
Plaehen, T. (2020). How Do Lease Purchase Agreements Work? Retrieved from: https://homeguides.sfgate.com/lease-purchase-agreements-work-8023.html
The Basics of Lease Options and Purchase Sales. The Balance. Retrieved from: https://www.thebalance.com/lease-options-and-lease-purchase-sales-1798417