Home prices are at an all-time high and are rising by 2.9% annually. Home prices have risen since the recovery from the 2008 financial crisis and they have boomed further during the global pandemic. Affording a house has become increasingly difficult for all generations, whether they are still working or retired. For this reason, rent to own has continued to be a good option for many. For example, in 2017, there were 9.2 million renters at the age of 65 or older. But how does rent to own work?
How to Start the Rent to Own Process
Everyone is familiar with the traditional rental agreement. You’ll endlessly pay rent to a landlord and never own the property you live on.
If you’re renting, you may be missing an opportunity to buy real estate by paying one month at a time. This is called rent-to-own.
There are positives and negatives of both main processes. By the end of this article, you’ll be able to figure out which way of renting is best for you.
How Does Rent to Own Work?
How rent to own works is by buying a house or property over time by making rental payments. Think of it as a mortgage, but without the down payment.
When you rent-to-own, you’ll lose the involvement of a bank, an ownership deed with your name on it, and the option of making bubble payments. For lots of people, these are non-issues, but these factors are make-or-break for others.
In a rent-to-own contract, you are renting a property out for a certain period, after which you own the property. In the real estate industry, we call it a financing lease.
Rent to Own Checklist
There is no one true way of renting-to-own. Each property owner has their own process and requirements that a renter has to go through. Still, there are some core transactions that must be made. Below are some basic rent-to-own transaction processes.
Deciding on the Agreement Type
The rent-to-own process can initiate either with a lease agreement with the option to purchase or a lease agreement with the obligation to purchase.
If you enter a Lease Agreement, you and the landlord set a purchase price which you have to pay over a certain period. Once you’ve paid off the lease, you get to choose whether you want to buy the property or not.
If you are about to enter a Lease Agreement, you should consult with a real estate agent to help negotiate the price of the house on your behalf. We have an easy way for you to find the best agents, enter your zip code below and we’ll connect you with a great agent right away.
This agreement, on the other hand, doesn’t give you that luxury. You have to purchase the house once the agreement is fulfilled.
If you’re curious how rent to own works, you might also be wondering, why wouldn’t you want to purchase a house after making all the previous payments? While most of the time the last payment is the same as the rest, but sometimes the last payment is significantly higher than the normal rent price. This may make you reconsider buying the property you have been renting.
Under a lease agreement that includes a purchase agreement, the landlord has the right to involve the court. This would mean you are legally obligated to buy the home.
The second part of the rent-to-own home process is to make an ‘option payment’. As the name implies, the amount payable is negotiable, unlike the rent payments. It usually amounts anywhere between 1-5% of the purchase price of the property. Think of this payment as the down payment.
Remember, this is much less than a mortgage down payment, making it a more attractive offer.
Deciding the Rent to Own Terms
Next, you and the landlord negotiate the rental term and in effect the rental prices. Since the price is already determined at the time of selecting the agreement, its time you both decide how soon the payments will end.
It is well advised that you take your real estate agent with you at this meeting. The goal should be to set rental prices that you can afford. At the same time, having a good financial position at the end to be able to make the final payment.
Defining Maintenance & Renovation/Remodeling Roles
After agreeing upon the rental term and prices, settle who will be responsible for maintenance. This mostly depends on you, whether you want to do the maintenance yourself or have the landlord keep maintaining the property.
Most people choose to be responsible for maintenance themselves, gaining the freedom to do with the place as they please, including remodel, without the permission of the landlord.
Signing the Agreement
Once everything is finalized, it’s time to sign the deed. Let your agent go through the agreement to ensure that everything is in order and in your favor. You should only sign the agreement if you are feeling confident in the deal.
How Does Rent to Own Work: Pros and Cons
Renting to Own Comes with a handful of pros and cons. You’re taking on some of the responsibilities of owning a house, as well as taking a chance financially. The market is ever changing and there’s no way to tell when is the perfect time. At the same time, there’s a bit more leeway with the agreement between owner and renter. Here’s some bulletpoints of what you might encounter with a Rent to Own home:
Pros of Rent To Own
- There is no significant down payment, thus letting you build equity for the final payment.
- You can apply for a mortgage at the time of the final payment.
- You and the seller can agree on how much rent you’ll pay and for how long.
- No buyers’ competition, so you won’t have to outbid anyone at the time of purchase.
Cons of Rent to Own
- You might have to take on maintenance charges (which is not a bad thing in everybody’s eyes).
- By the time you get to the final payment, the local real estate market demand might have gone down.
- The contract favors the seller, releasing the landlord in case of even the most minor infractions
- The same issues you face when renting will apply when you rent to own
The Bottom Line
We’ve now covered in, “How does rent to own work?” Renting to Own is the easiest way for you to make a major investment even if you have bad credit.
When searching “how does rent to own work?” you’ll find the answer is as simple as making regular payments to use the property for a certain time period. It can be for either residential or commercial use. In most cases, there is an agreement for the minimum period for which the tenant has to rent that property and security deposit.
Once the contract period expires, it’s only as simple as moving out and collecting your security deposit back (after maintenance and utility deductions). If you’re not ready by then, you can always extend the contract, or sign a new contract.
Find an Agent for Rent to Own Properties
If you can’t buy a house, but you want one, consider a rent-to-own option. If you’re still stuck on the question, “how does rent to own work?” talk to one of our agents. They will be happy to help.