Rent to Own – How the Process Works
“Rent to Own” is a phrase used in the real estate agency to describe an alternative means of obtaining property outside the traditional realm of renting or buying. This process may also be described as “Lease to Own” or “Lease Option”. These types of agreements provide a tenant with the option of purchasing rental property. In the traditional sense, purchasing a home involves the acceptance of an offer from a potential buyer, a meeting between the seller of the property and said potential buyer, and the exchange of funds to successfully settle final costs and the price of the home. Once the transactions draw to a conclusion, both the property and the title to the property is moved from the seller to the buyer. In most instances, a buyer utilizes a mortgage in order to finance the purchase. Rent to own – on the other hand – involves a buyer that rents the property for a specific amount of time. Immediately thereafter, they then have the option to exercise a pre-outlined option to purchase the property at the expiration of lease, or immediately before this expiration. In this comprehensive guide, you will learn the details of how the rent to own process works.
If an individual has an interest in a particular home – yet, lacks the means to immediately purchase that home – a rent to own agreement may be made which allows that person to move into the home. In most cases, an agreement that governs the rent to own option requires that a tenant reside on the property for a designated amount of time prior to exercising their option to initiate the purchase of that property. A contract is outlined that contains specific terms and conditions that must be successfully met by the tenant. If the tenant is able to act in accordance with those terms and conditions, then the owner of the property will be willing to allow them to utilize their rent to own option.
Does the Rent Go Towards the Purchase Price?
Those that have an interest in renting to own almost always wonder if the money that they pay in rent will go towards the purchase price of the home. Regulations vary by state and preferences vary by landlord; however, it is common for a percentage of the rent payment to be applied to the price of the property. This is referred to as a “rent credit”. Property owners are not obligated to offer a rent credit, but most will include this as part of a rent to own contract. For example, if a renter pays $800 a month and the rent credit is 10%, $80 will go towards the purchase price each month. The rent credit is a form of a down payment that goes directly to the seller. These types of credits may result in an increase in rent each month; however, they offer potential buyers a convenient means of placing money towards the purchase of a home that they may – otherwise – not be able.
The Purchase Price
Individuals that elect to opt for a rent to own contract will find that the purchase price is outlined within that contract. In many cases, the overall price of the home may be above the average of the current market. This is often due to the fact that the seller is taking a bit of a higher risk and is willing to negotiate with those that may not be able to purchase a home through other means. If the purchase price is not included in the original contract, it may be outlined when the lease expires.
What is Option Money?
The rent to own process often involves option money. Simply put, this is a one-time payment that is typically non-refundable, which is rendered at the time the contract is signed. It is a monetary hold that allows a tenant the option to purchase the home at a future date. There are some cases where the tenant is actually held under obligation to purchase the property when the lease expires. It is imperative that the tenant determine – prior to the signing of the contract – as to whether buying is an option or an obligation. Option money may be as little as 2.5% percent of the total purchase price, or higher.
Technically, the individual that owns the property is responsible for the maintenance of that property; however, many contracts may designate the potential buyer as the individual responsible for the maintenance. This includes repairs, upkeep, fees from homeowner associations, insurance, and the taxes due on the property. If the seller elects to cover maintenance, the tenant should obtain renter’s insurance. This will cover losses associated with personal property, coverage for injuries experienced while living on the premises, and accidental injuries to others. If there are maintenance requirements contained within the contract, the tenant should be in complete understanding of the details of their responsibilities prior to signing.
Once the lease ends, the tenant may then choose to purchase the property – if the contract outlines that buying it is an option. If the tenant elects to not buy or they are unable to obtain the means to finance the remaining balance of the purchase price, the option will then expire. This indicates that the tenant forfeits any and all monies paid to that specific time. This includes the rent credit as well as the option money. If the tenant is obligated to purchase the property – as outlined by the contract – but, does not want to or is not capable of doing it, the seller may elect to initiate legal proceedings. If the tenant chooses to purchase the property, they will secure financing at the expiration of the lease in order to pay the seller – in full. The rent credit and/or option money may then be applied to the purchase and deducted from the price. Once the closing is completed, the tenant is an official buyer and becomes the owner of the property.