Home prices are at an all-time high, rising by 2.9% annually since the recovery from the 2008 financial crisis and has 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, renting 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.
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.
What is Rent to Own?
Rent-to-own is the process of 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.
Is it a good idea to Rent to Own?
In short, 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, you’ll be able to reap the rewards immediately. But if buying a house is not possible for you now, investing in home ownership 1 month at a time is likely your best option.
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. This gives you more flexibility and options.
How the Rent to Own Process Works
There is no set process 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.
Obligation to Purchase
This 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 the 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 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, dealing with an outside source, or if you want or have the landlord keep with 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 your favor. You should only sign the agreement if you are feeling fully confident in the deal and going through the rent-to-own process.
Rent-to-Own: Pros and Cons
- 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 (which could be much lower than the full price of the property).
- 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.
- 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
This form of renting a house is the easiest way for you to make a major investment even if you have bad credit.
Rent-to-own 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.
If you can’t buy a house, but you want one, rent-to-own confidently. For some help getting started, talk to one of our agents. They will be happy to help.