Home prices are at an all-time high, rising by 2.9% annually since the recovery from the 2008 financial crises. Affording a house in the US has become increasingly difficult for all generations, whether they are still working or retired. For this reason, renting has continued to be a good option for many. In 2017, there were 9.2 million renters within the US aged 65 and above.
Many are familiar with a traditional rental agreement where rent is paid by the tenant for the duration of occupancy. There is also something called rent-to-own which allows money paid to the owner to go toward eventually purchasing the house. But what are the differences, how does a rent-to-own home process work, and which is better?
Here, we’ll discuss both, but focus on the rent-to-own process.
Rent-to-own is a process by which you can buy a house or property through making rental payments. Think of it as a mortgage, but without the option of bubble payments, the involvement of a bank, an ownership deed with your name on it, and most importantly, without the down payment.
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.
Is it a good idea to Rent-to-Own?
For some people, yes. Rent-to-own agreements allow you to live in a home even if you have bad credit or cannot qualify for a mortgage. If you are in a financially tight situation, you could see the most benefit from a rent-to-own agreement. If you are able to buy the house outright this offers the most immediate benefits, but if you’ve found a home you’d like to invest in, a rent-to-own agreement allows you to occupy your own house by paying rent until you’ve paid off the house OR until you can take out a mortgage on the home.
There is no set process of renting-to-own. Each investor has their own process and requirements that a renter has to go through, but some core transactions 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.
As evident from the names, at the end of the first agreement, you and the landlord set a purchase price which you have to pay over a certain period, at the end of which you get to choose whether you want to buy the property or not.
The second agreement, on the other hand, doesn’t give you that luxury. You have to purchase the house once the agreement is fulfilled.
You might 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, sometimes the last payment is significantly higher than the normal rent price, leading to uncertainty.
Under the lease agreement with the purchase agreement, the landlord has the right to involve the court, meaning you are legally obligated to buy the home.
Paying an Option Fee
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 Rental Term
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, now it’s time you both decide how soon the payments will end.
It is well advised to take your real estate agent with you at this meeting to ensure you don’t end up drawing the short stick. The goal should be to set rental prices that you can afford and at the same time, having a good enough 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 with the place that you want or have the landlord keep the property in good shape.
Most people opt 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 your favor.
Rent to Own Pros and Cons
- There is no significant down payment, thus letting you build equity for the final payment over time.
- You can apply for a mortgage at the time of the final payment (which could be much, much lower than the full price)
- You and the seller can agree on how much rent you’ll pay
- No buyers’ competition. You won’t have to outbid anyone at the time of purchase
- 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
Traditional Renting Pros and Cons
This form of renting a house is as simple as making regular payments against using a property, be it for 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 the security deposit back (after maintenance and utility deductions).
- Maintenance is Optional
When renting, it is only your ethical consciousness that dictates you to keep the house properly maintained or remodel it. Otherwise, if anything needs to be fixed or replaced, you simply have to call the landlord.
That is unless there is a specific clause in the lease agreement that dictates you to have to pay all expenses out of pocket.
- There is No Need to Stick to One Place?
Don’t you like your landlord? The neighborhood not what you were expecting? Don’t worry; you simply have to complete the contract period and then roll on to your next house. You don’t have to waste any time finding a good listing agent, looking for offers, or selling the house before you move on.
- Less Liability
Most often, rental prices are much lower than mortgage payments, effectively saving you thousands of dollars per annum. Renting can save you hundreds or even thousands of dollars each year.
- Not Enough Freedom
Renters can’t be ‘free’ with their house. Each time you want to remodel, renovate, or redecorate your house, you are going to have to ask your landlord for permission.
- The Idea of Making Someone Else’s Payment
Although not a major drawback, many people find this demeaning or troubling. When you’re renting, you’re paying whole or part of someone else’s mortgage, where you could be doing the same for yourself.
The rent and rent to own process are very different from each other, but each has its own merits and demerits. If you’d like to know more about the process of rent to own a house and whether it’s a good idea for you or not, contact us, we’d love to help you out with all your real estate needs!