Rent to own a house is also called lease to own house (or a whole slew of other phrases… like “lease option”, etc.).
So how does rent to own homes work?
Let’s start by saying, we don’t advocate for this type of financing. This will probably upset many real estate investors but this is written to inform potential buyers of the benefits AND the pitfalls of buying through a rent to own agreement. In a few cases it may work, but in the majority of them the renter leaves without purchasing the house and forfeits their deposit or because they aren’t getting the advice of a Realtor or a real estate professional and relying on the seller they aren’t informed that they should get an inspection and have any defects fixed. In addition, because they aren’t required to get an appraisal they don’t know if they are paying above market price. In most cases they are.
How Does A Rent To Own Home Agreement Work?
It is kind of similar to a car lease.
In this kind of arrangement, the renter rents a house from the owner of the house and pays monthly rental fees for living in the house. After a given period of time, usually three years or so, the renter can decide to purchase the house at a price that the renter and owner of the house agreed upon at the start of the rent to own agreement.
Of the monthly rent paid to the owner, a fraction can sometimes go towards down payment of the house depending on the local laws and guidelines. Sometimes applying part of the monthly rent to the purchase price is now against the law because of a law passed by Congress called the Dodd Frank Law.
The Rent To Own Contract Agreement – How It Works
The contract the buyer and seller draw up should be very clear. You should understand the nature and terms of the contract properly before signing it. Make sure you ask the seller lots of questions if you’re not clear about anything at all.
This arrangement has got advantages for both sellers and buyers alike… but also some huge benefits. So understand both the pros and cons so you can make a great decision for you and your family.
The Financial Parts Of The Rent To Own Agreement
First, the seller has to set the purchase price and monthly rent for the house.
The Monthly Rent
The purchase price is usually retail value for the house in today’s market and most times to offset them accepting less than stellar credit it will be at a premium. The monthly rent is usually a bit higher with a rent to own / lease option agreement than if you were to just rent a house normally.
Why?
Because you’re paying for the ability to purchase that house at the end of the agreement and you’re locking that house down so others can’t purchase or rent it during the entire term of the agreement.
The Purchase Price
The agreed and signed price and rent is settled and locked during the entire rental period of time, which is usually between one and three years. You can purchase an appraisal for the home at a cost of between $375-$600 and a home inspection will probably cost between $450-$900 depending on if you request a radon inspection. This will cause most sellers to back away as they will see that you are an informed buyer. If not, then this is probably a legitimate seller.
The agreed price doesn’t change during the agreement based on market prices, whether they rise or fall. That’s one of the big benefits of buying a house here in Decatur, Atlanta or Cascade with a rent to own… that you can lock in to buy a house at a price today… and not have to buy the house for 1 – 3 years… and that purchase price won’t go up over those years.
The Option Fee / Upfront Payment
There is an option fee that the buyer pays the seller. It is a set amount of money payable to the seller by the buyer before you move into the house. This amount can really vary based on who you’re working with and the house price… but a rule of thumb is usually 1-5% of the total house purchase price is what you can expect to pay upfront to enter the agreement… and this payment is usually non-refundable if you decide to NOT buy the house at the end of the agreement.
This option of buying a house with a rent to own agreement is very good for buyers who would otherwise be unable to purchase a house or whose credit score wouldn’t meet the required threshold for a mortgage.
The rent to own opens up the potential “buyers pool” so more people get into great homes.
For buyers, it lets you work toward home ownership and have that sense of pride you feel when you own a home.
The End Of The Rent To Own Agreement… What Happens?
Of course the idea of getting into a rent to own home is that during the rental term… you improve your credit and financial stability so you can get a normal home loan at a bank.
So during that whole period… you should be really working to improve your credit… save up money… and work with a local mortgage broker or bank to get pre-qualified BEFORE the rent to own agreement expires.
At the end of the rental period, you as the tenant / buyer have the choice to either buy the house at the price in the agreement… or you can walk away and not buy the house just like a normal rental house.
If you choose not to buy the house, no biggie at all. You can move out of the house and onto another house… or under special circumstances you may be able to update the rent to own agreement to give you a bit more time to get qualified for a bank loan to buy the house.
With a Rent To Own Program the ultimate goal is to help you reach your goal of home ownership. So the seller can be flexible often times if you need an extra few months to get things lined up financially and with the bank to close on the house.
Just like in any other way of buying a house, there are mutual pros and cons for both the buyer and seller.
So just do your research… keep browsing this website and check out our Frequently Asked Questions page… or give us a call anytime at 404-299-7100 or shoot us an email on our Contact page to chat with us and our local rent to own program.
Last… have you found the rent to own house that’s perfect for you yet?