Rent To Own
For homebuyers, rent-to-own programs are a useful tool for those that have bad credit and do not qualify for a standard home loan. Rent-to-own agreements are good for real estate investors and owners of the homes who want to find a good tenant. A rent-to-own tenant, who desires to stay in a home paying rent until they can buy it, because the chances are that the rent-to-own tenant will take better care of a property. Someone who gives a down payment for a home and plans on eventually buying it has a strong incentive to maintain the property.
Buyer’s Point of View
Typically, the amount of a down payment is 3% to 7% of the sale price of the property. The average is 5% down and all of the down payment goes towards the purchase price.
Money for the down payment can come from friends, family members, a savings account, from a 401k, cashing in an IRA (a penalty may apply), selling an asset, getting an advance from an employer, or taking a cash advance using credit cards.
The rental lease period can be from one to five years. The average lease period for a rent-to-own contract is three years.
The price of the sale of the home is determined at the beginning of the rent-to-own contract. It stays the same until the home purchase is final. This may be advantageous if the purchase price is a good value and if the home value goes up during the lease portion of the contract. Some agreements allow a portion of the lease payments to be applied against the purchase price.
A buyer can work on credit repair during the lease period and improve credit scores in order to qualify for a home loan. Traditional mortgage lenders like to see that a potential buyer has already made a cash down payment on a home as well as that consistent, on time, lease payments were made over a period of years.
If the appraised value of the home increases during the lease period, the mortgage lenders use the higher value during the loan approval and evaluation process.
From the buyer’s perspective, once the home purchase is final, there is no need to move, which is an attractive prospect for those living in the home.
Seller’s Point of View
In the rent-to-own contract, it gives the renter the option to buy the home at a certain price. The down payment is the consideration for the option to buy the home. If the buyer’s fails to complete the purchase of the home, the seller gets to keep the down payment.
Sellers get a better quality tenant who is serious about taking care of the home because they want to buy it eventually. Sellers get to have a steady renter for a long-term lease, which gives a continual cash flow to the seller until the purchase is complete.
Summary
A rent-to-own contract can be a viable option for both buyers and sellers, depending on the circumstances. Because these contracts are somewhat complex, be sure to receive competent legal advice.