What is Rent-To-Own?
A rental agreement and an option to purchase are the two processes to start with the contracts. Similar to a standard lease indicating the rental price and term of agreement which is usually 2-3 years is the rental agreement. The option fee is outlined by the option to purchase. Fee ranges from 2%-7.5% of the home’s purchase price often. You have the opportunity to pay this fee on a monthly basis and it is eventually put towards the home’s purchase at the end of the term. The option fee is refundable if the home is not purchased at the end of the agreement. How to find rent-to-own homes.
Advantages, Disadvantages, and Considerations for Sellers
There are lots of advantages for sellers when selling a property on Rent-To-Own. There are some things that need consideration in order to know if selling your home on Rent-To-Own will be a good idea;
- Do you need to cash out all of the equity in your home? If you absolutely need to have all the cash at closing, Rent-To-Own is probably not a viable solution. You can consider doing a cash-out refinance; however, you will probably not find a bank willing to finance 100%. It will likely be at most 80% Loan To Value.
- Do you need to have the existing loan on the property paid off in order to qualify for your new home? If the answer to this is yes, then Rent-To-Own will not work well for you. The loan will remain in your name until your prospective buyer is able to secure financing in their own name.
- Will you be able to cover your mortgage and costs with a rent payment? In some markets, the rent prices will not be high enough to cover the cost of a mortgage. It would be prudent to perform a rent survey in your area to validate your expectations. Keep in mind that often times a Rent-To-Own buyer may be willing to pay more than market rent in order to have the option to purchase the property at a future date.
Some of the advantages could be positive cash flow, tax benefits, a higher selling price and an upfront down payment or option payment provided Rent-To-Own is a viable option. Potential buyers will be needed by sellers to maintain the property and handle routine maintenance because they have an interest in owning the property. Delayed sale, managing rent, managing tenants and sellers remain on the title and on the loan so their credit is tied up are some of the disadvantages.
Advantages, Disadvantages, and Considerations for Buyers
It is applicable in all real estate purchases that the buyer needs to be diligent about the purchase of a home even if it is Rent-To-Own. Below are some key things to consider and be aware of before going through the process.
- The purchase price is agreed upon up front however, it may require a little more market research to know if it is a price that will work for you as a buyer. Buyers need to understand that the purchase price will likely be somewhere between today’s value and the projected value at the end of the option period. As a buyer it is important to negotiate the purchase price and be comfortable with it going into the deal, understanding that the actual value will likely be different when it comes time to get a loan.
- What Maintenance and repairs are you expected to be responsible for? It may be all of them because you are expected to have an ownership mentality; however, it would be prudent to limit the amount you could be responsible for. As an example, it is reasonable to expect that the buyer would be responsible for replacing a water heater if it goes bad, but replacing the furnace may be more than you are willing to take on.
- It may be a good idea to get an inspection ahead of time. It may not help you negotiate on price or terms, however, it will be a benefit knowing what you are getting into.
When it comes to buying on Rent-To-Own, there are several advantages to it. One of it is the fact that you will have time to get finances and credit in order to be able to close on the home you already live in. You also have the option of not buying the property if the house is not what you expected or your needs change overtime. There is flexibility to create equity in the property by making improvements and thereby improving your chances of getting suitable financing. Some of the disadvantages are that you will likely pay more for rent, and the agreed upon purchase price will likely be higher than what you would pay if you were able to finance it today, and you will not be able to take advantage of the tax benefits of owning a home because you will be renting for a period of time.
Important Items to Note from Buyers and Sellers:
- This is an option. That means that the buyer has an option to purchase the property. They are not obligated to purchase the property at the end of the option period.
- The seller will still be on title to the property until the potential buyer either pay cash or obtain a new loan in order to exercise their option.
- If the property appreciates beyond the price in the agreement, the potential buyer can still purchase the property at the original agreed upon price as long as it is within the terms of the option agreement.
- Paying/Collecting rent electronically can provide a significant benefit for both sellers and buyers. It provides a third party verification that the rent payments were made on time and will help the buyer qualify for a mortgage. It also eliminates the hassle of having to drop off rent, going to the bank, writing checks, etc.
Rent-To-Own can be very advantageous for both buyers and sellers a long as key considerations are observed, and both sides do their diligence in order to ensure they are meeting their objectives in the transaction.