How does Rent To Own work?
First, it’s important to understand there are 3 interchangeable terms used to describe Rent To Own Homes:
- Rent to Own Homes
- Lease to Own Homes
- Lease Option
In a rent to own home transaction, you are renting a home under a traditional lease that includes a Buy Option Agreement. The Buy Option Agreement states an agreed-upon purchase price between you and the landlord. At any time during the option period, you may exercise your right to purchase the home at the agreed-up price. Option periods typically span 1 to 5 years. In order to exercise your Buy Option Agreement, you must qualify for a real estate mortgage prior to the Option Period expiring. In other words, the biggest advantage of a rent to own transaction is that it gives you several years to get your credit history and finances in order, while your rent payments are also reducing the amount you are ultimately going to pay for your home.
How do my monthly rent payments ultimately reduce the price I pay for the home?
Rent Credits represent the amount of your monthly rent payment that is applied to the future purchase price of your home. Rent Credits are pre-negotiated and should be detailed in the Option Agreement. One catch, most Option Agreements only allow you to earn Rent Credits when your monthly rent payment is made on time.
What Fees are associated with Rent To Own homes?
The only nonrefundable fee associated with a rent to own home transaction should be the Option Fee. Also known as an Option Consideration Fee, the Option fee is typically required upon signing the Buy Option Agreement and ranges between 2% to 5% of the ultimate purchase price. But don’t forget, while this fee is nonrefundable, it also should be 100% applied to reduce the future purchase price of your home.
What happens if I fail to Qualify for a real estate mortgage before my Option Period ends?
If you are unable to purchase the home during the Option Period, one of two things typically happens:
- The contract expires and you lose your legal right to purchase the home at the Buy Option Agreement price. Furthermore, you typically forfeit the Option Fee and Rent Credits to the seller.
- Most Option Agreements offer you the ability to extend the Option Period. In these cases, there is typically a small fee involved and possibly other criteria you must meet in order to extend the Buy Option Period. For example, a seller may require that all of your previous rent payments were made on time and/or that you get approved for a real estate mortgage loan within a certain period of time.
This seems too good to be true, what’s the catch?
There is no “catch” and rent to own is a viable option for tens of thousands of families across the nation. However, like anything that involves money, there are always a few bad apples and certain pitfalls to avoid. Here’s a quick checklist of things to look out for:
- Your current monthly rent payment should represent fair market value of comparable homes in the same area. In other words, you should not be charged a noticeable premium for monthly rent.
- The purchase price of your home in the Buy Option Agreement should represent fair market value of comparable homes in the same area. If the value of the home appreciates during the Option Period, you are getting a good bargain. If the value of the home declines during the Option Period, you are not required to exercise your Buy Option Agreement. In other words, you and the seller should equally bear the risk of fluctuations in the property’s value during the Option Period.
- Your upfront Option Fee should never exceed 7% of the agreed upon purchase price of the home. In fact, be skeptical of any Option Fees higher than 4% of the purchase price of the home and try to negotiate them down.
- 100% of your upfront Option Fee should always be applied to reduce the agreed-upon purchase price of your home. Make sure this is included in your Buy Option Agreement.
- Always make sure your Buy Option Agreement includes your right to have the Option Period extended just in case your credit history and financial plans take longer than 1 to 5 years.