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Credit problems and the inability to save up a down payment top the list of things that keep people from buying a home. Renting to own eliminates both obstacles, but it can be a risky transaction for the tenant. Find out what rent to own is, how it works — and whether it’s a realistic path to homeownership.
What Is Rent-To-Own?
Rent to own is a transaction where a tenant and property owner enter into a several-year lease with the understanding that the tenant wishes to purchase the home at a later date. In the meantime, the tenant pays an option fee for the right to purchase the home later, and they make small payments toward their eventual down payment along with their regular rent payments. The tenant might also be responsible for home maintenance and repairs.
If things go as planned and the tenant buys the house at the end of the lease term, the property owner will credit them for the payments they made during the lease term.
How Does Rent-To-Own Work?
Rent to own is like two transactions in one — a lease and a sales agreement. How it works depends on the type of you have.
As the name suggests, a lease option lets you choose whether or not you buy the property at the end of the option period. A lease purchase, on the other hand, obligates you to purchase it.
Here’s what is usually included in both rent-to-own lease types:
- Lease (option) term
- Rent amount
- Option fee
- Purchase prepayment amount to be paid with rent
- Responsibility for maintenance and repairs
- Purchase price
- Provisions for return or forfeiture of monies paid in the event the tenant doesn’t purchase the home
Although rent-to-own agreements pose benefits and risks to both parties, the tenant bears a disproportionate level of risk.
Good To Know
Tenants should have an attorney review their lease option or lease purchase agreement before they sign.
What Are the Benefits of Rent-To-Own?
Tenants sometimes look for rent-to-own properties when they want to buy but don’t qualify for a mortgage, usually because they’ve been unable to save enough cash or they’ve had credit problems. The option term gives them time to get their finances on track so that they’ll qualify for a mortgage loan once the lease ends.
For property owners, rent to own is a low-risk transaction. For one, the long option term means they don’t have to worry about potential vacancies each year, which costs them money in lost rent and the work involved in finding a new tenant. In the event …….