If you desire to own your own home but are unable to secure conventional financing today, leasing a home with an option to buy maybe your best option. A lease purchase can make your rent money work for you instead of making your landlord rich. Typically rent to own homes offer rent credits that reduce the final purchase price!
Here’s How It Works:
A home is made available via a standard lease with one important addition. Included is an option to purchase that home at a specified price over a specified time (usually one or two years). To acquire that option, the renter/buyer must pay a one time, nonrefundable, fee called the option consideration.
The exact amount is negotiable, but it usually ranges from 2.5 to 7% of the purchase price. A fair contract will credit the buyer 100% of that option consideration upon closing of the sale. Furthermore, a negotiated percentage of all rent payments should be applied to the purchase price of the home. Some typical terms and conditions one might expect to find in a contract follows:
To receive a rent credit of 50%, time is of the essence. You must pay your rent on or before the due date of your lease (typically the 1st of the month). This means it must be received by the landlord on or before the due date. Any payment received after the due date will result in a 0% rent credit for that month, a late fee may apply and you will not be building any equity.
Maintenance is the responsibility of the Tenant Buyer. You are now renting to own and homeownership requires maintenance. This includes things like broken windows from stones or baseballs, clogged drains, peeling paint, broken appliances, burnt out bulbs, lawn work/snow removal, etc. If any major repairs are required to ensure habitability, the owner remains responsible.
You need to have Option Consideration. Option Consideration is typically 2.5% to 7% of the purchase price of the home. It is a non-refundable payment, of which 100% is credited toward the purchase price, which binds the lease-purchase contract.
What’s The Catch?
There are many possible reasons a landlord/seller may want to enter into a rent to own agreement. Some reasons may be:
Needs to maintain ownership for at least one year for tax purposes.
Unable to get a fair price due to local conditions.
Tired of performing minor maintenance.
Furthermore, when one sells a home through a realty service, a commission of 5-7% is typically paid. This can cost more than the rent credit. Since realtors are usually not involved with this type of transaction, there is no commission and the landlord can afford to pass along the savings to tenant/buyer in the form of rent credits.
Also, when the Tenant becomes the Tenant Buyer (via rent to own), there is an immediate sense of pride in ownership. Tenant Buyers add value to the community. They take care of their future property, make improvements, and feel good knowing their rent money is working for them (reducing the purchase price) rather than just making their Landlord rich.
There are also many advantages for the renter:
Build equity toward homeownership.
No bank or finance company involvement.
Poor credit history may not be an issue.
When it comes to rent to own properties, there are numerous advantages especially if you are not in the financial situation to purchase right away. This can be a great opportunity for those looking to build equity towards homeownership and not have to pay the down payment upfront all at once.