When you should choose rent to own, and when not to.
A rent to own home is a special type of agreement that allows you to buy a home after a few years of renting. In a rent to own contract, you can pay a bit more in rent than the fair market value. This extra money then becomes your down payment at the end of the lease. When looking into rent to own contracts, first thing you might notice is that there’s no ‘standard’ rent to own contract. These contracts are usually written by legal advisors working with the buyers and home owners. In general, a rent to own contract usually covers a period of between 12 months to as far as 30 years. This is the time you rent the home before buying it. The buyers usually pay an option fee when they move in. This gives you the first option to purchase the house, it is typically non refundable and also a sign of goodwill that the tenant is serious interested in buying the property at the end of the contract. When the time comes to buy, the option fee is usually applied to the down payment. If the buyer decides not to buy the house, then the seller keeps the option fee. The purchase price is set in the rent to own contract when you move in, not at the time you buy the house. So typically, you can’t negotiate the sales price after you have rented for the term of contract. In addition to this, unlike a more traditional landlord and tenant scenario, the buyer is responsible for maintenance to the home prior to purchase.
Here are some pros of rent to own
You get to test the property:
When renting to own, a buyer gets to experience daily life in the property, the area and see if it matches their ideal home scenario. If it turns out that they would rather stay somewhere else, then it’s a simple matter of finishing the lease versus being locked in permanently to owning it.
Investment at the same time
Instead of rent money being a pure expense, renting to own means it goes toward greater equity or value as a contributing factor in the final purchase price. Your income will be put to use twice.
Price gets locked in
Property values keep going up, especially in rapidly developing areas. At the start of a rent to own contract, the final selling price is already locked in so even if the property appreciates in the intervening years, the buyer can enjoy it at a discounted price as compared to the surrounding properties.
Feels better to pay for your own home
Psychologically, renting to own also just feels better. Rent is not pure expense or ‘throwing away money’ and it’s also actively contributing to everyone’s dream to buy their very own home.
However, there are some cons to rent to own homes
Lease purchase versus Lease option
A lease purchase agreement means the buyer is obligated to purchase the house instead of reserving the first option to buy it. Even if you’re confident that is the home for you, and that you should have the money to buy it at the end of the contract, there are always events that could change your mind. What if you get your dream job and it’s located across the country or what if you or a member of your family has a health emergency and you have to move? What if there is a global pandemic and your financial circumstances change? If you’re totally sold on the idea of rent to own, don’t consider lease purchase agreements, insist on a lease option agreement instead; because if the past few years have taught us anything, it’s that you never really know what will happen in a year or two.
The purchase price might be inflated when the time comes to buy
The contract will usually stipulate how much you’re going to pay to buy the house at the beginning of your contract, so the buyer is effectively locked into that purchase price. The buyer and seller will agree on a price at the start of a contract based on how the market is doing then and they might not get it right. The price documented in the contract could be much higher than the home’s market value at the time of purchase, which could be a problem when it’s time for a real estate appraiser to come into the picture. A bank won’t loan more money than a house is worth. Before signing a rent to own contract, talk to a market expert like a real estate broker to get their opinion about how the market is growing or shrinking in order to land on a price that you think is fair.
3. You probably won’t get all your extra investment back: There are three payments that you will make toward your home during your contract. The option fee (non refundable), monthly market rate rent (non refundable) and the additional money that you pay per month, which goes toward your down payment(usually refundable). However, beware of additional fees. The seller might stipulate in the contract that they are charging an additional convenience fee on top of all the rest for allowing you to rent and then purchase the home at a later date. The seller has the right to keep your option fee, your monthly rent and any additional convenience fee. This will mean money you’re spending that isn’t going toward your down payment. Make sure you’re clear on how much you’re going to get back in the potential situations under which the seller could keep all your money and then determine whether it’s worth it to you.
If you’re late with one payment, the whole deal could be over
Many rent to own contracts states that if the buyer is late on their monthly payment, even once, they no longer have the option to purchase the home, loose their option fee and potentially also loose the extra rent they have been paying. Before signing your contract, you need to make sure you’re clear on what happens if you are late on one or more rent payments and exactly when the rent is due every month. Be sure to also note any reasons for eviction listed on your contract. The sellers of the home are looking for the smallest excuse against the lease to use against the buyer to evict them from the house, pocket that substantial part of the down payment and then put the house back on the market to be sold or rented out again under the same terms. Always make sure that before you sign, the lease is not geared to meet the needs of the seller only but also fair to the renter.
In conclusion, while rent to own homes has its benefits, one must also consider the disadvantages before proceeding. The National Home Ownership Fund has produced a on demand survey form so that interested people can access the programs more easily. Honest survey responses will help personalize housing solutions to individual needs and speed up the process of home ownership through mortgage and rent-to-own programs.