If you haven’t heard of rent-to-own agreements then you might be in for a pleasant surprise! If you’ve been wanting to buy a home for quite some time, you understand how frustrating the traditional home-buying process can be. The path to becoming a homeowner can be long and costly. Not everyone has the money upfront to buy a home through the traditional route. Whatever the barrier you face may be, a rent-own-agreement could help pave a path to homeownership for you!
What to Know About Rent-to-Own Homes
Buying a home might not be an option for you right now due to a number of reasons. Rent-to-own agreements can be beneficial because typically in these types of deals, a portion of the rental payments can go toward the purchase of the home. However, not all rent-to-own agreements are the same. Your rental contract can be written up as either a lease option or a lease purchase. Lease-option contracts give you a choice to buy the home at the end of the term, while lease-purchase means you have the obligation to buy it.
Some Perks That Come with Rent-to-Own Homes
Rent-to-own contracts are a good option for people not currently in the right financial situation to make a purchase. There are many specific situations in which Rent-to-Own properties could benefit. For now, we can just name a few circumstances where someone may be able to benefit from this type of agreement. These include those who may:
- Face obstacles buying a home the traditional way
- Require additional time to save up for a down payment
- Need to raise their credit score
Fees Associated with Rent-to-Own Properties
One upfront fee to be aware of is the option fee. The exact fee is negotiable, however, it is nonrefundable. The fee typically falls between 1% and 5% of the home’s purchase price. Although this home-buying process can benefit people who aren’t prepared for a down payment, there are still fees you need to be aware of. This particular fee is necessary for the homebuyer to secure their option to buy the home in the future.
The Purchasing Process for a Rent-to-Own Property
The process of getting into a rent-to-own agreement can be broken down into four steps. These steps include:
- Negotiating and agreeing on a purchase price
- Reducing the principal balance with monthly rent payments
- Purchasing the property once the lease ends
Negotiating and Agreeing on a Purchase Price
Negotiating on price is a common practice in the traditional home-buying process. The same is true for deciding on the purchase price of a rent-to-own property. However, the process does look a bit different. There are a couple of ways that the price is determined. Whichever way you decide to go when entering into this type of agreement, you should understand how the price will be agreed upon before signing!
Reducing the Principal Balance with Monthly Rent Payments
The rent paid over the course of a lease can eventually be credited toward the purchase price of the home. However, the exact percentage of each payment that will go towards the purchase is different for each agreement. To give an example, let’s assume the cost of rent is $1,500 per month and the lease term is 4 years. If 25% of the rent payments will be used towards the purchase price, that totals $18,000 over the course of 48 months. When it comes time to buy the property, that amount of money is credited to the total purchase price.
Purchasing the Property Once the Lease Ends
How this final part is handled depends on the agreement that was made between the buyer and the seller when entering into the contract. In some cases, the renter may have entered into a contract that requires them to buy the home when the lease ends. If the renter does not purchase the home even though they are required to, they could face penalties. For example, this could happen if the renter cannot secure the financing they need.
Life happens and plans change! This is why having the option to buy rather than committing ahead of time is favored by potential buyers. However, this agreement also has its downsides. If the renter decides not to buy the home, they’ll need to move out when the lease expires. When that happens, the renter usually has to accept that they won’t get back any money they have paid up until that point. If the renter does decide to move forward with the purchase, then they will likely need to have a mortgage secured when the time comes to buy! Either way, it’s best to be almost certain that you want to end up living in the home long term, before entering into either type of agreement.
Money tends to be looked at as a taboo subject. Your neighbors, family members, and friends might not be very open about their finances or their assets. However, when people are willing to share how they were able to become successful it opens up possibilities for others who want the same things!
It’s common to assume you can’t buy a home right now if your finances aren’t perfect. Fortunately, there are other options to consider, like rent-to-own properties! You may not know it, but many people don’t become homeowners by going the traditional route. Instead, they choose to become a homeowner through rent-to-own agreements. These agreements make it easy for people to focus on saving up a down payment, improving their credit score, and so on. All while focusing on moving into a home at the end of it all!
Keep in mind that not every rent-to-own agreement is the same! In some cases, the renter will have the option to purchase the home when the lease expires. In other instances, the renter will commit in advance to buying the home at the end of the lease. Sometimes the purchase price is predetermined and other times it’s decided when the time comes to buy. It depends on the unique agreement you and the seller come up with.