Learn About Renting to Own

Many Americans want to own a home. However, homes seem to only increase in price. This is because of the growth of cities and the resulting increased demand for housing.

Often, home purchases require high incomes and a large amount of savings. Furthermore, homebuyers must often visit a lender in order to finance their purchase if they cannot pay for it in cash. Banks and credit unions are common lenders but they often require that homebuyers to have high credit scores.

A favorable option for potential homebuyers is a rent-to-own property especially if they cannot yet afford to purchase a house. This type of property allows renters to improve their credit scores, increase their savings and prepare to purchase a home while living in it. Residents can greatly benefit from this type of agreement if it suits their goals and needs. Continue reading to learn about rent-to-own properties and how you may be able to take advantage of them.

What is rent-to-own?

A rent-to-own agreement is a unique way for residents to purchase a home. Under a rent-to-own contract, residents do not have to pay cash or finance through a home loan in the beginning. Instead, they rent the property for a certain amount of time before purchasing it. Different property owners have different rent-to-own agreements but certain details are consistent across many contracts. For instance, residents contribute rent payments for a certain period of time. They also pay a portion toward the home’s portion at the same time. The price of the property is typically decided upfront.

How to Determine the Purchase Price

An essential component of a rent-to-own agreement is the purchase price of the home. The price is usually determined by both the landlord and tenant. Both should carefully consider pricing options and come to an agreement. It will be beneficial for both parties to discuss and negotiate all important details before making any pricing decisions. Doing this can help prevent disagreements after the rental period is over and the renter is ready to make the home purchase. However, deciding on a purchase price can be difficult for both parties.

Tenants and owners have two options for determining a property’s purchase price for a rent-to-own agreement. One option is to wait to set the home’s price. Using this method, tenants and property owners negotiate a price at the end the rental agreement instead of at the beginning. This option can be beneficial to the seller or owner especially if home prices in the area are predicted to increase over the length of the rental period. Then, the seller can negotiate with the tenants based on those market conditions.

Another option is to set the home’s purchase price at the beginning of the rental period, when tenants first sign the rent-to-own agreement. When sellers and renters negotiate at the beginning of the agreement, they usually decide on a price that is higher than the market value of the home at that time. This option can be more beneficial to renters. This because they will know the value of their rent payments and can avoid paying significantly more for the property in the future if the home’s market value significantly increases during the rental period. On the other hand, this option can also backfire. Home values can significantly decrease or not increase enough to match the pre-determined purchase price.

Learn About the Benefits and Drawbacks of Rent-to-Own Properties

Rent-to-own properties can be helpful solutions for many residents looking to own a property. However, it may not be the best option for other renters. The greatest benefit of this type of agreement, purchasing a property, is mostly beneficial for renters who are certain that they can make the financial commitment in the future. They might currently lack the funds and high credit score but are in the process of increasing their savings and credit. Agreeing on a rent-to-own property allows residents to start building equity on the property as they rent. Moreover, the rental period will allow them time to increase savings and credit scores enough to make a down payment after the period is over.

One disadvantage of rent-to-own agreements is the lack of flexibility. Traditional leasing agreements typically come with flexible terms and conditions. Therefore, residents who are certain that they want to purchase a particular home, and thus do not need flexibility, may benefit from this type of arrangement. When buyers first sign a rent-to-own contract, they are usually required to pay an option fee. This fee is usually non-refundable and serves as a guarantee that the renter has the option to buy the property after the rental period is over. Tenants who pay this fee also have the option of not buying the home after the rental period. However, if they back out of the purchase they will lose the fee. Some sellers will allow buyers to apply a portion of the fee toward the down payment which serves as an incentive to some potential buyers. When residents are signing a rent-to-own contract, they must make sure that they have the options of purchasing the home or walking away from it after the rental period. Agreements that do not mention options may legally obligate the renter to purchase the property after the rental period concludes.

How to Find Rent-to-Own Properties

Finding rent-to-own properties may not be as easy as finding traditional properties. However, residents may be able to find rent-to-own listings on website that provide regular rental and home listings. Although, websites with this option usually require a membership. There are other ways to find rent-to-own properties. For instance, buyers can approach home sellers and ask about the option of creating a rent-to-own agreement. Sellers are more likely to agree if their property has been on the market for a significant amount of time. However, in areas where home are selling quickly, property owners may be less likely to consider the option. Furthermore, tenants who are currently renting may be able to persuade their landlord to consider a rent-to-own agreement. Property owners who are planning to sell the home in the future may be more receptive to this option.