Houses for Sale

Rent to Own: What Does It Mean?

Rent-to-own contracts are a bit different from the typical mortgage agreement. For one, you won’t have to give up a large amount of money for a down payment, which means you will have more funds to put towards other essentials. It also means that while you may be renting initially, you will eventually be able to own the home outright. Paying your rent on time each month builds equity in the home, which is good for you. Once your contract is up, you will be able to decide if you wish to purchase the property or move on.

What Is It?

A rent-to-own home is one that can be purchased via a rent-to-own agreement. When you agree to the terms you will be able to rent your home for a certain amount of time and eventually be able to own it. Contract terms can be anywhere from multiple months to many years; this varies with each individual situation. The contract involves the seller committing to hold a particular amount of each month’s rent to be added to the home equity for when the buyer closes. Equity is the amount that a home is valued on the market minus the amount you still owe. High equity is very beneficial for homeowners. There are two types of rent-to-own agreements; a lease purchase agreement, and a lease option agreement. Be careful here though; if you go with the lease purchase agreement you are legally bound to purchase the home at the end of your lease term. You should go with the lease option agreement if you are not sure about your future in the home.

The Process

While not every situation is going to be exactly the same, there is a general outline that most rent-to-own agreements follow. The first is establishing the purchase price, specifically when it will be decided and how. The home’s purchase price can be based on its current value or a value that it could be estimated to be in the future. Some contracts solidify the price upon the signing of the contract, others don’t decide until the lease term is up, and the renter wishes to buy. Another aspect of the contract is the rent payment amount. You will be promising to pay a particular amount in rent each month and since these payments are ultimately building equity and leading to a purchase, they are going to be more expensive than the average rental in the area. It is a good idea to review the maintenance obligations and other fee responsibilities in your contract if there are any. There are sellers who wish for the buyer to be responsible for all repairs, property taxes, HOA fees (if applicable), and more. You could even be made to cover the cost of a new AC unit. Make sure you are clear with the seller on what your responsibilities are and read your agreement closely to avoid any surprises. Another term listed in most contracts is something called option money. This is a one-time fee that is non-refundable. It allows you a chance to purchase the home at a later date and occasionally you can negotiate with the seller to have them put the amount towards your home’s equity. This fee varies and there is no minimum amount; it will likely be calculated as a percentage of the purchase price. Both parties will need to agree to a lease term. If your lease comes to a close and you opt not to purchase the home or are unable to for some reason, your lease will expire. If you want to buy the house when your lease is up, you will need to get approved for financing as early as possible. Once you obtain financing, your lender will choose your closing date.

Final Thoughts

Renting to own is different for everyone as the terms are negotiable. It is a good idea to seek out the help of a real estate agent who can assist you during this process and perhaps a lawyer who can review and explain the terms of your contract to make sure everything is clear to you. Don’t sign anything that you do not fully understand. There are some perks to this arrangement, however, if you are considering a rent-to-own agreement, you should do plenty of research so that you can be aware of the risks as well.