Are down payments or credit scores putting homeownership beyond your reach? Rent-To-Own offers the flexibility of homeownership, as you work on your credit and save for that downpayment. With Rent-To-Own, locking in the sales price protects you from increases. However, be sure you understand the facts of this type of transaction or you’ll end up with buyer’s remorse.
Finding the Right Rent-To-Own Home
The first step in Rent-to-Own, home purchase or lease are exactly the same; you have to find a house. Finding the property that best suits your needs in a location that is right for you can be a timely process. Rent-to-own searches will take even longer as this type of real estate contract is less common.
Be sure the property is in good repair by having a qualified home inspector do a thorough inspection. If the inspection uncovers any significant problems, you will want to factor repair costs into your decision to move forward or start looking for a new location. If doing a home purchase, you would be putting earnest money into escrow and finding a good Mortgage company at this point.
Rent-to-Own agreements are quicker to obtain than traditional purchase with a mortgage. However, the time until you own the property is much longer. The actual home purchase does not even begin until after a specified rental time which depends on the contract.
Unique Circumstances Where Rent-To-Own is a Good Option
Have you ever driven by a home and fallen in love with it? Do you know someone who is considering selling their home but is not quite sure? A vacant home and an owner who is hesitant to sell create a good rent-to-own opportunity.
Homeowners can increase cash flow by renting a property that was otherwise vacant or difficult to sell. Long rental terms with higher than average rent are obviously advantageous for property owners.
Are you ready to be a homeowner but unable to gain financing? This is another instance where you may wish to consider a rent-to-own option. However, be sure you speak with a local banker/mortgage broker about possible first time home buyer programs or other programs in your state. (Read about Arizona State Programs. ) Even if you are still not qualified to purchase a home, you will have a better understanding of what you need to do financially to prepare.
When you are buying or selling a home, your realtor protects your interests. In rent-to-own, it is a contract that you and the homeowner negotiate. Consider hiring a real estate attorney to assist you in contract negotiations. This is the best way to ensure you come out with a fair and equitable contract. Knowing what to avoid is crucial to obtaining a fair agreement. You must do your due diligence because ultimately you are responsible for what you sign. You should be able to understand the terminology and scrutinize the terms of the contract carefully. Pay special attention to the following terms:
- Rent credit. In a rent to own agreement, it is standard for some portion of your rent to go towards the down payment on the home. Usually, the rent credit ranges between 10 percent and 25 percent, but again, it all depends on what you negotiate with the seller. There are no hard and fast rules for the rent credit. You should insist that the rent credit is kept in an escrow account to protect you and the seller.
- Purchase price. Some rent-to-own agreements establish the purchase price when the contract is written at the beginning of the lease. Other contracts state that the fair market value will be determined at the time of purchase. Either way, you want the decision on the purchase price in the agreement.
- Lease term. The lease term defines how long the lease will last before you will need to buy the home or move out. You and the seller can agree to any lease term you like. Most rent-to-own lease terms range from one to three years. Be realistic about how long it may take you to get ready to buy—including repairing your credit and saving up for a down payment. A one-year lease term may not be long enough for you to get your finances in order.
- Option fee. This is the fee you are going to pay the seller for the option to buy the home. The option fee is usually something you can negotiate. Typically, the cost will range between 2 percent and 7 percent of the purchase price of the home, although it can be lower or higher depending on your individual circumstances. Try to negotiate to have the option fee applied to the price of the home.
- Maintenance. You can negotiate who is responsible for property maintenance, both everyday maintenance like mowing the lawn, and significant maintenance like replacing the roof or the HVAC system. Major maintenance is expensive, so be careful about what you agree to. Again, be sure you have a thorough home inspection before signing the agreement.
- Lease option or lease purchase. You have two different options when it comes to a rent to own agreement—a lease option or a lease purchase. You want to be confident that you clearly understand the language in your contract because there is a big difference between the two. Watch out for lease-purchase contracts which can legally obligate you to buy the home at the end of the lease regardless of ability to pay. To have the option to buy without the obligation, it needs to be a lease-option contract.
- A lease option is an agreement that gives a renter a choice to purchase the rented property during or at the end of the rental period. It also precludes the owner from offering the property for sale to anyone else. When the term expires, the renter must either exercise the option or forfeit it. A lease option is also known as a lease with the option to purchase.
- A lease-purchase agreement means you are legally obligated to buy the house at the end of the lease regardless of ability to do so.
Bank Financing a Lease Option
If you find a home with an owner who is willing to do a rent to own agreement, you will negotiate an arrangement with them. Generally, this includes living in the home and paying rent for a specified period. The rent includes an extra amount that is allocated toward a down payment on the property. The good news for renters is that typically, banks will allow the total funds of the premium above the rental payments to go to the downpayment for purchasing the home. However, if the rent charged was an at-market rate, the bank may not allow any of the funds to be applied to the purchase price. It’s important that buyers check with multiple banks to determine their policies regarding financing a mortgage for a home with a lease option.
For assistance finding homes for sale in the Scottsdale area, or listing a property for sale, contact the professionals at Platinum Realty Network.