Updated June 21, 2023
What is Rent to Own Home?
The term “rent to own home” refers to the arrangement that allows a tenant to rent a property with the option that the tenant can purchase it before the expiry of the lease. In other words, rent to own is analogous to an automobile test-drive; in this case, the tenants can test-drive a property by living in it for a certain period before deciding to buy it. On the other hand, the owner or seller uses the opportunity to lock in a sale price.
How Does Rent to Own Home Work?
The owner and tenant negotiate and determine a purchase price for the property in the contract. After that, the tenant can purchase the property at that price at some point in the future, regardless of its actual market value. Typically, the sale price is higher than the property’s ongoing price as it considers the projected increase in value. If the property value increases faster than expected, it works out in the renter’s favor. On the other hand, the seller ends ups benefitting if the property loses value in the future.
The buyers usually pay an upfront option premium of up to 5% of the purchase price. It is non-refundable but can be adjusted with the down payment. The rent-to-own contracts also include the monthly rent amount, often higher than the actual rent. The excess amount is usually adjusted with the ultimate purchase consideration, reducing the final payout when purchasing the home.
Examples of Rent to Own Home
Let us look at the following example to understand the concept of rent to own a home.
Gavin (tenant) entered into a 2-year rent-to-own agreement with Scott (owner). The upfront option fee in the deal was 5% of the home’s $200,000 purchase price, which came to be $10,000. Besides, the monthly rental was $2,000, and the lender transferred 20% of the rent (= 20% * $2,000 = $400) into an escrow account during the four years of the lease. So, at the end of the lease period, the $10,000 upfront option fee and another $19,200 (= $400 * 48 months) in rent credits were deducted from the purchase price. It means that at the end of four years, Gavin had to pay $170,800 (= $200,000 – $10,000 – $19,200) as the final payment to purchase the home.
Maintenance of Rent to Own Home
Based on the terms & conditions of the contract, the tenant may be responsible for maintaining the property and paying for its repairs. However, this is the landlord’s responsibility because after it is their house until sold. So, a tenant must read the agreement carefully before signing it. Nevertheless, the tenant should take a renter’s insurance policy to cover future losses associated with the house.
How to find Rent To Own Homes?
Rent-to-own opportunities aren’t that readily available, but they are out there. The tenant can opt for the traditional route of legwork or use some online services. First, they need to find rentals on some listing websites and earmark some properties with a history of being on and off the market. It could indicate that the landlord is looking to offload the property but hasn’t had much luck. So, the owner might be willing to consent to a rent-to-own proposal. The tenant can also seek the help of a seasoned real estate agent who can help negotiate with the landlord and present an offer. This is how one can find an appropriate rent-to-own home property.
Advantages of Rent to Own Home
Some of the significant advantages of rent to own a home are as follows:
- First, it is a good option for buyers who otherwise don’t qualify for traditional housing loans due to financial issues.
- It provides the tenants ample time until the expiry of the lease term to arrange for the funds required for the property purchase.
- It allows the tenants to assess the living experience during the trial period before buying the properties.
Disadvantages of Rent to Own Home
Some of the significant disadvantages of rent to own a home are as follows:
- First, it can become costly because it comes with higher payments than the usual rent.
- These schemes often make the renters bind to the agreement’s conditions, which can sometimes become burdensome.
- Once the tenants agree to rent-to-own contracts, they effectively narrow their options. They can’t avail themselves of any favorable movements in home loans or property prices.
Some of the key takeaways of the article are:
- Rent-to-own contracts allow the tenants or prospective buyers to lease the properties with the option to purchase them at the expiry of the lease terms.
- These contracts allow the renters to buy the home at a particular time in the future.
- A part of the monthly rental goes to be accumulated as credit that is adjusted with the home’s final purchase price.
- The buyers often pay a non-refundable upfront option premium of up to 5% of the sale price.
So, rent to own a home is a good scheme for buyers who are willing to purchase a home but are unable due to their inability to get traditional loans. It is a mutual agreement between the renters and the landlords. However, these deals can fall apart if the legal aspects are not adequately fulfilled.
This is a guide to Rent to Own Home. Here we also discuss the definition, working, examples, maintenance, how to find it, and advantages and disadvantages. You may also have a look at the following articles to learn more –