A rent to own home is where you lease a home, but you also control the property by having the option to purchase it at any time during your lease period. The owner can not market the home for sale, since he/she is bound by their agreement to sell the home to you at a pre-determined price that you agree on before you move in.
There is two parts to the agreement: the first is a standard lease that spells out the monthly rent, and other standard lease terms. The second part is a Real Estate Option. This is a one way agreement that binds the Seller to sell to you at an agreed upon price. The Seller has to sell when you want to buy (during the option term), but you don't have to buy if you don't want to. That is why it is a one way agreement.
The lease option has a fixed period after which it expires. The term is typically one to two years and is negotiated between you and the owner. To secure the rent to own option, a down payment is necessary. This is known as "Option Consideration". This consideration is compensation to the owner for taking the property off the market and to guarantee a future price to you. The rent to own option consideration will be applied as a reduction to the purchase price at the time you decide to buy. It can also be counted as a down payment instead in order to help you qualify for a loan.
If you decide not to purchase the property, the rent to own option consideration is not refunded. It is kept as compensation by the owner for guaranteeing the price to you for a fixed period of time. Your intent should therefore always be to buy the home once you enter into a rent to own agreement. The option consideration is typically 3% to 7% of the agreed upon purchase price and is negotiated up front.
You should always ask for a rent credit. This is beneficial for both the Seller and the Tenant/Buyer. You agree to pay slightly higher than market rent, in exchange for receiving a percentage credit to the purchase price for every rent payment made on time. Eg. Let's say market rent for a specific home is $1,200. You agree to pay $1,400 a month in rent, but in return you receive a $400 a month rent credit if you paid on time. If you leased the rent to own for one year, you would have accumulated $400*12 = $4,800 in rent credits, which will reduce your purchase price even further. In other words, a portion of your rent is saved towards the purchase of your rent to own instead of losing the entire amount to the landlord.
Why Would I Want To Rent To Own A Home?
There are many benefits, and a few downsides. Good reasons for deciding on a rent to home are:
- You can't qualify for a mortgage right now, but you don't want to throw money away on rent either.
- You may need some time to fix a few credit blemishes but don't want to put off your decision to buy while you work on your credit.
- You can qualify to buy a home right now, but need to put down a large down payment because the loan program requires it, and you don't have it right now.
- You are buying a multi million dollar home and got a good price on it. The mortgage company tells you that you need to put down at least 25% because of the high loan amount, and you don't want to. Because you know that after one year in a lease to own arrangement the transaction could be treated as a refinance using the appraised value of the home, you put 5% down now, lease for a year, then refinance. The net result is you just bought yourself a multi million dollar home with only 5% down. Pretty neat.
- You're relocating out of state to a new city. You can't get a mortgage because you don't have a job in the new city yet, but you know you can get a job pretty easily. Moving into a rent to own allows you to get the home you want right now, and then you can always buy it once you have received your first few pay cheques.
There are a few downsides, here they are:
- If you don't buy the home, you lose your option consideration.
- You are still paying rent. You are saving much more than you would if you just rented outright, but it is still not your home quite yet.
- If the primary reason you are entering into a lease to own transaction is because of poor credit, then you are on the clock. It will give you an incentive to work on your credit. Just make sure you don't run out of time. We are going to write an ebook to tell you how you can Repair Your Credit in 6 months or less, regardless of how bad it is right now. Go to the "Contact Us" page and leave us your email and we will send it to you for free once it is ready.