What Is Rent To Own and How Does it Work?
A “rent-to-own purchase” or “lease purchase”) is a lease combined with an option to purchase the property within a specified period, usually 3 years or less, at an agreed-upon price. The borrower pays an option fee, which is credited to the purchase price. The borrower pays rent, and an additional rent premium that is also credited to the purchase price. If the purchase option is not exercised, the buyer typically loses both the option fee and the rent premium.
The sale price of the house and the rent are market-determined, yet subject to negotiation just as in a straight purchase or rental transaction. Buyers often know less about the market than sellers, which places buyers at a disadvantage unless they do some homework, which is advisable.
Buyers generally prefer a long option period because it provides more time to build equity and repair credit. However, a long period can work against them if they are never able to exercise the option, since they lose the rent premium they have been paying (in addition to the option fee). Sellers generally prefer a short option period, but if it is too short, the house won’t be sold.
The lease-purchase can offer homeownership opportunities to consumers who can’t qualify for a loan from any source, but who are prepared to bet on themselves. The bet is that before the option period expires, they will qualify for the mortgage they need to exercise the purchase option. During the option period, they have the opportunity to rebuild their credit and accumulate equity while living in the house.
Rent-to-Own: Smart Questions to Ask…
- Who will tend to the property and pay for routine maintenance?
- Who pays for major repairs?
- What are the costs of setting up and managing an escrow account for the portion of rent allotted to the down payment?
- Will you manage the property yourself, or hire an agent?
- What if the renters change their minds? Who keeps the money in the escrow account?
- If the buyers change their minds, what will be required to put the property back on the market?
- How much of the rent is going to the down payment?
- How locked in are you if you change your mind?
- What will it cost you to get out of the deal?
- How long will it take to accumulate enough of a down payment that you are likely to qualify for a mortgage?
If you or someone you know is considering a ‘rent to own’ and have questions please call. I am happy to help and help you determine if it is a smart option or if you would better off renting OR buying.
Mike 303-669-2744 x 105