What is Rent-to-Own?

becoming a popular way for selling a property, especially in areas where the market is slow. We are seeing more and more companies advertising that they have a house or condo for sale, and offer to do Rent-to-Own. But not a lot is known about exactly how it works, and to whose benefit.

Rent-To-Own is very similar to a car lease.
With a car lease, you put down a deposit and make payments for a specified period of time at the end of the lease you have the option (not the obligation) to purchase the car for a predetermined price.

Rent-to-Own works in much the same way. A buyer puts down a “purchase option” deposit, usually less than the traditional 5% required by the bank, and makes a monthly payment. And a portion of the rent is credited towards the future down payment.  The end purchase price is predetermined at the time of signing.

The Rent-To-Own agreement involves two contracts, one contract will be a regular lease contract, and the other will deal with the purchasing part of the agreement. This contract will be for a period of time that is agreeable to both the seller and the buyer, usually anywhere from one year to three years. The buyer will have to pay the regular amount of rent, and in addition, they will have to pay a monthly installment that will be credited towards the down payment.

There are usually clauses in the contract that state if the buyer is late or misses any payment, the contract is null and void. As well, the buyer may be responsible for repairs and maintenance; however, sometimes the seller will accept responsibility for major maintenance issues.

What are the benefits of Rent-to-Own?
A Rent-to-Own Agreement can be an excellent option for people who want–but are not financially ready–to become homeowners. A Rent-to-Own agreement gives them the chance to get their finances in order (by improving their credit score and saving money for a down payment, for example) while “locking in” the house they’d like to own. If the option money or a percentage of the rent goes toward the purchase price, they also get to start building some equity.

One thing to keep in mind is that house prices are always changing. The calculations are based on today’s prices, and it can be next to impossible to calculate what the house may be worth in the future. Sometimes this is addressed by agreeing to a certain percentage increase for each year of the term, and sometimes sellers will ask you to agree to pay the appraised value of the house at the end of the term. In this case, you may have to pay a little extra at the end of your term to meet the 5% down payment.)

A Rent-to-Own agreement allows potential buyers to move into a house while getting their finances in order to purchase the home in the future. It’s not without risks, since they could end up losing money if they don’t (or cannot) buy the property when the lease expires. You must be confident that this particular real estate deal is of benefit to you, and that you can afford to take the risk of not being able to follow through with the contract. If there’s a good chance you won’t be able to qualify for a mortgage or secure other financing by the time the lease expires, you should instead continue renting (with a “normal” lease), building credit and saving for a down payment. Then, when you’re ready, you can choose from any home on the market in your price range.

Not every seller will structure the Rent-to-Own in the same way, but as in any real estate deal, you can always try to negotiate the terms that are not satisfactory to you. It is very important that you get independent legal advice for any contract that you sign.

Understanding the current market value of your home is a crucial 1st step in determining the right time to sell. Call me today for a no obligation Free Home Evaluation.