Rent-to-own or rent to buy homes are properties that you can purchase via a rent-to-own agreement. When you sign a rent-to-own contract, you agree to rent a property for a specific period to gain ownership. This period can last several months to several years, depending on the term agreed between the buyer and seller.
Otherwise known as lease to own homes, both companies and individual sellers can own lease-to-own (or rent-to-own ) properties. However, the financial agreements involved are much different than typical home-buying transactions.
As part of the rent-to-own contract, the seller agrees to designate part of each monthly rent payment and add it towards the buyer’s equity to finally purchase the property. An advantage of the rent-to-own process is that all costs are negotiable. This includes the purchase price and closing costs.
How Does Renting to Own Work?
When figuring out how to rent-to-own a house, you must first choose between a lease-purchase agreement and a lease option agreement.
With a lease option agreement, you can decide whether or not to buy the home after an agreed rental period. However, if you choose a lease-purchase agreement, you are under a legal obligation to purchase the property.
Although there’s no one-size-fits-all option for the rent-to-own process, most rent-to-own transactions include these components:
A rent-to-own agreement must specify when and how the purchase price will be decided.
This price can be based upon the property’s current value or an estimated future cost. In many cases, the price becomes official when both buyer and seller sign the rent-to-own contract. In other cases, the price is finalized when the lease expires.
As part of your contractual agreement, you’ll agree to pay a specified amount of rent every month. These payments tend to be higher than average rent prices in the area as a percentage is credited towards the property’s future purchase.
After entering a rent-to-own agreement, the seller can ask you to pay for costs associated with maintenance, repairs, property taxes, and HOA fees. We recommend walking through the contract with an experienced real estate attorney, or you may be legally obliged to pay for all these things.
You’re legally required to pay the seller a one-off, non-refundable fee. The purpose of this charge is to provide you with the opportunity to buy the property. In some instances, the seller will agree to deduct this money from the price of the property. There’s no set price for this fee; however, it’s generally a percentage of the property’s purchase price.
You and the seller must agree on a specific lease term in your rent-to-own contract. If your lease is finished, and you can’t qualify for financing or don’t want to purchase the property, the option to purchase will expire.
If you plan to buy the property, you must secure financing at the end of the lease term. At this point, the lender will disclose a closing date when you, as the buyer, will be provided with ownership of the property. Then, depending on the terms of your agreement, the percentage of rental fees set aside for your purchase and your option fee will be credited to you.
As the rent-to-own process undergoes less regulation than traditional buying or renting processes, there is no standard rent-to-own contract. All terms are entirely negotiable.
Therefore, if you’re wondering how to rent-to-own a house and have started negotiating, you must talk to an attorney and a real estate agent to ensure that you fully understand the terms of your contract.
How Effective is Renting to Own?
Due to the complexity of rent-to-own contracts and negotiations, there is a range of risks for both buyers and sellers:
Risks for Buyers
Although you plan to increase your income or improve your credit to purchase the property at the end of the contract, this may not work out as planned.
If you don’t buy the property, you’ll lose all the extra money you’ve paid out.
The landlord could stop making mortgage payments and lose the property, a situation you have no control over.
The property’s value could drop, and you may be unable to negotiate a lower purchase price.
Late Payments Can Cause Damage
Depending on your agreement, if your rent is late, you could lose the right to purchase.
There could be problems with the property that are hidden until you try to finalize the purchase. These include title problems. So, be sure to do some due diligence before signing a rent-to-own contract.
Risks for Sellers
Rent to own contracts can last for years, trickling in a slow amount of income instead of a lump sum.
Your renter may not be able to afford to buy, which means you’ll have to begin the sales process again with a new renter or buyer.
Sales prices are typically locked in when you sign a rent-to-own contract. If house prices in your area rise faster than you anticipated, you could be left out of that increase.
Decreased Home Prices
If the property prices in your area fall and your renter does not buy, you would have been better off selling the property earlier.
Buyers could discover flaws that you knew nothing about and decide not to finalize their purchase.
When learning the ropes on how to rent to own a house, you would presume sellers have the upper hand. However, this is not always the case.
How Do You Find a Home to Rent-to-Own ?
Searching Google for ‘rent-to-own homes near me’ or ‘rent-to-own near me’ is a good start when trying to secure a rent-to-own contract. The search results should highlight some nearby rent-to-own programs. Alternatively, you could:
Speak with an Experienced Agent
During the house-hunting process, having an experienced agent at your disposal is invaluable. Search for an agent who has a wealth of experience working with rent-to-own transactions as there can be many unfamiliar terms and conditions in these contracts.
Sellers will work in their best interest, so a buyer’s agent could help to protect you from a bad deal.
Look for a Brokerage with a Rent-to-Own Program
It’s worth considering working with a brokerage or agent that provides dedicated rent-to-own programs and locates properties to rent with a right-to-purchase.
Contact the Seller
If a seller has been finding it tough to sell their property, a rent-to-own arrangement can be a lucrative option. Your rent will provide the seller with monthly income while giving you a place to live.
Find a Reluctant Landlord
You and your agent may be able to locate a landlord that needs to sell a property but is slightly reluctant. Your rent-to-own offer could provide them with the perfect transition towards a sale. Many of these landlords have just one rental property, and they’ve rented it out after having difficulty selling it.
Use a Speciality Portal
One good source for potential rent-to-own properties is the foreclosure market. When a homeowner is facing foreclosure, they could become open to rent-to-own contracts.
However, you can’t establish a rent-to-own arrangement if the house is in foreclosure already. If the owner is in pre-foreclosure, they could benefit from the rent that they collect while securing a path to their property’s eventual sale.
Rent to Own Legal Process
Once you’ve decided whether you want a lease purchase or a lease option, you can draw up a lease agreement (rent-to-own contract).
When creating this agreement, there are several essential matters to consider, which are different from a regular rental agreement:
A market appraisal typically determines the property price. In most cases, the price is set slightly higher than the current market value, as this accounts for future market fluctuations.
Also known as an option premium, this is a non-refundable fee that is paid in exchange for the option or right to buy. This fee is typically calculated at 2-7% of the property value.
Length of Term of the Lease
Lease terms are usually 2-5 years on average in lease-to-own agreements. This allows the buyer to build equity in the property.
As mentioned above, monthly rent is typically higher than the market rate as a portion of the fee is credited to the home’s purchase.
Some property owners allow buyers to make a refundable option deposit towards their rent-to-own purchase. If the buyer decides not to go through with the purchase, the owner returns this money.
Other Monthly Payments
You must determine who is responsible for paying repairs, utilities, property tax, and homeowners association (HOA) fees during the legal process.
Discover How Reali Can Help
If you need to secure financing at the end of a lease term on a rent-to-own property, we can help.
Or perhaps you’re struggling to make monthly payments on a rent-to-own agreement and need a loan to stay afloat? Don’t worry—we offer one of the easiest ways to apply for a mortgage online. Check your rates and take a step toward financial freedom today.