http://rentownhomelistings.gq | Rent-to-own homes allow people to buy the home they are leasing and use the rent they have paid as a credit toward their mortgage down payment.
The specifics of the contract will differ, but the general idea is that the prospective tenant/buyer will sign a contract to rent the home with an option for them to purchase the house at the end of the lease. The time period where they can live in the house before a lease expires is often between 1-5 years, and when they buy the house, a portion of the rent payments during the lease goes toward putting down a down payment. Ideally, this takes a sizable chunk out of the purchase price.
Let’s say you’re living in the home for 3 years before deciding to purchase it. The purchase price is $300,000. Your monthly rent is $1,650, and $300 of that goes toward the down payment. By the time the lease expires and you’re prepared to purchase the house, you’ve already given a $10,800 down payment over three years. That’s nearly 4% of the original purchase price, knocking it down to $289,200.
How the purchase price of the house you’re renting to own can vary as well. Some contracts stipulate that the purchase price will stay what it was when the initial contract was signed, while others have it be the market value of the house at the time of purchase. Some contracts eschew each of these for a different method entirely, having the purchase price go up a certain percentage every year of the lease. Rent-to-owners can decide to buy the house any year of that lease.
There are generally two different types of rent-to-own deals: a lease-option agreement and a lease-purchase agreement.
What is a Lease-Option Agreement?
In a lease-option agreement, you will have to give a usually nonrefundable payment at the beginning of your lease term. This payment, known as option money, is a small percentage of the purchase price of the rent-to-own house. If the aforementioned $300,000 rent-to-own house had a contract stipulating 3% in option money, you would be required to pay $9,000 at the beginning of the contract.
Should you buy the house, that option money goes toward the purchase price of the house, which would now be $291,000. If, however, the lease expires and you decide not to go through with a purchase of the house, that money has been forfeited. You won’t get it back.
What is a Lease-Purchase Agreement?
A lease-purchase agreement does not involve any option money, but there is much more that it sets in stone. The date of purchase is established, as is when the purchase price will be established (aka, will it be the price it is at the signing of the contract or the price of a home appraisal at an established future date?).
In building a down payment with the aforementioned percentages of rent, that monthly payments may be higher than your average rent in the area.
The positives of rent-to-own are that it can try to help make the home buying process simpler and more convenient for people who, for a number of reasons, do not have the money to put a down payment down on a house right now.
In a sense, it can slow down the process in a beneficial way for the buyer. Someone with bad credit now not only has a place to live, but a timetable to try and get their credit to a more respectable level in time for the lease to end and a purchase to be made. Someone down on their luck with regards to jobs and illnesses has time to recover physically, mentally and financially without the stress of worrying about their living situation.
Negotiating your rent-to-own contract has potential for additional positives as well. You’re free to try and get the deal you want from the home before signing a contract. You can try to negotiate the purchase price, rent payments, and who is responsible for maintenance.
These are extremely important, especially if they go your way. Getting the house for current market price looks great if prices rise in the next few years, and having the landlord be responsible for major maintenance is a huge help for someone saving money for a down payment.
Doing proper research on a house that you can rent-to-own can help save you from being stuck with a house in desperate need of expensive repairs. A prepared prospective tenant has a better chance of finding a livable rent-to-own house.
Some individuals prefer the rent-to-own option because the burden is decreased for the tenant. The risk for the two parties will be divided when the contracts are balanced.
It gives people the ability to test out a home and the neighborhood before sinking in all their savings.
As the number of available homes in the market or a particular neighborhood can shrink and mortgage interest rates are rising, it is a good test run for many individuals, said Monica Webster, a managing director for William Raveis, a Shelton, Conn.-based real estate firm.
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