Are you wondering about rent to own real estate? While this method of purchasing a home is very uncommon, if you do enough research and start the process with your wits about you, it’s possible that this could be a beneficial option.
Here’s what you need to know:
What is Rent to Own Real Estate?
Typically, when you buy a home, you make an offer, meet with the seller to deposit the down payment and settle final costs, and then the property and its title belong to you.
As most homebuyers cannot pay the entire purchase price of the home up front, they would then use a mortgage to finance the rest of the payments.
But there is another option: rent to own real estate.
Sometimes this type of deal is called a “lease option” or a “lease to own” agreement. What it means is that when you sign the lease, you agree to rent the home for a predetermined amount of time before exercising your “option” to buy the home at the end of your lease.
How Does Rent to Own Real Estate Work?
Although each state has its own regulations about rent to own agreements, they are usually never as simple as renting a house for a year or two and then just buying it. There are certain conditions that you need to adhere to, per your contract.
At the beginning of a rent to own real estate agreement, the buyer pays the seller a one-time, non-refundable fee called an option fee, sometimes known as option money or option consideration.
Option money essentially functions as a down payment on the “option” to be able to buy the property in the future. It is important to pay attention to the specific language of the contract, however, because there is a difference between having the option to buy the home and an obligation to buy the home.
It is essential to understand which of these you are agreeing to before you sign anything.
Purchase Price of Rent to Own Real Estate
When you sign the initial contract, there will be a clause to determine how and when the purchase price of the home will be determined.
Sometimes, you will agree on the purchase price with the seller at the signing. In this case, the price will likely be right at market value, or slightly higher to adjust for inflation.
Other times, the buyer and seller will agree to determine the purchase price when the lease expires; however, especially in competitive markets, this is the least attractive option as the value of the home has the potential to skyrocket and price the tenant out.
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Usually, the seller requires that the potential homebuyer also be responsible for things that an actual homeowner would be during the term of his lease, like property taxes, HOA dues, and insurance.
It’s also important to specify who is responsible for maintenance in the initial contract – as things like lawn care might fall to the tenant, but replacing a cracked foundation would be the seller’s responsibility.
Is Rent to Own Real Estate a Good Idea?
It could be a good idea if you have a bad credit score, as 620 is usually the lowest a lender will accept. It could also work if your debt to income ratio is a little bit too high to make a home purchase at the present moment. In this situation, rent to own real estate could give you the time you need to start saving for the 20% down payment on your dream home while still actually living in it.
You can settle into a property you like while improving your credit score and saving up.
And, if the payments you make while renting count towards the purchase price, you can even start building some equity in your home.