How it Works
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Is It New: No! Rent to own housing is not an especially new concept. People have used this approach to buy real estate for years. However, its popularity diminished during the years of easy mortgage approvals and the run up of home buying in the early 2000’s. Those days of easy mortgage money are over.
Lenders returned to much more strict loan approvals, and homes do not sell as quickly and easily as they used to. So, the idea of rent with an option to buy has grown again in popularity. Why? Rent to own homes offer a classic win-win arrangement for both home buyers and sellers. It offers a great a solution for buyers needing an affordable and accessible path to home ownership. And sellers use it to help maintain cash flow, keep the property under careful tenant care, and finalize the sale.
A Word About the Words: “Rent To Own” or RTO is a term that’s well known and used in general, consumer language. Real estate pros prefer to use the term “Lease Option” when referring to these types of real estate arrangements. We’ll use both Rent to Own and Lease Option terms, but whenever a renter/buyer is discussing the rent to buy approach with real estate agents or brokers, be sure to use the “Lease Option” phrase.
How It Works: Buying a home with a lease option includes these steps:
Agree on a Purchase Price: Before a buyer moves in to a home acquired in a Lease Option transaction, the buyer and seller agree on the home’s sale price and other terms.
Lock Out other Buyers: The buyer will pay the seller a fee (the amount is negotiable) for the right to buy the home. This Option Fee prevents the seller from selling or offering the rent to own home to anyone else.
Occupy the Home as a Tenant: The buyer then occupies the home as a renter and pays the seller monthly rent for a certain length of time. This typically lasts from one to three years.
- Build Credits Toward Purchase: A portion of the rent paid is applied to the purchase price, as a rent to own credit over time. For example, if the rent is $1,000 per month, and $500 of this is designated as a rent to own option credit, over a 36 month rental period, the buyer will accumulate $18,000 toward the purchase of the rent to own home.
Both offering and buying homes for rent to own is good for buyers and sellers in a number of ways. For buyers, a rent to own arrangement provides time for mortgage qualification, credit improvement, and building up a down payment. Buyers who have good credit and cash, but still cannot obtain a mortgage due to overly tight bank lending policies can bide their time and continue to work on the mortgage approval process, all while living in the home they will buy soon.
Alternately, those buyers who are unable to secure a mortgage due to low credit scores can take advantage of rent to own homes to improve their scores by paying down other debt, gaining a consistent payment record with their rent payments, or completing credit counseling or credit repair programs.
Plus, in either case, if the buyer is handy with making repairs or conducting home maintenance (painting, making small physical repairs), the value of the labor put into fixing the home can be applied toward the purchase. This “sweat equity” can take additional thousands of dollars off the final purchase price and makes rent to buy even more affordable.
And, by leasing before buying, the buyer has an opportunity to test out the home and the neighborhood during the entire lease period. If, for some odd reason, the home turns out not what the buyer really wanted, it is still possible to cancel the sale of before the final purchase closes.
Sellers benefit from offering houses for rent to own because they maintain cash flow during the lease period, obtain an earnest deposit in the form of the option fee, and ultimately realize their goal of selling the home.
The 3 Pieces of a Rent-to-Own Arrangement: When it comes to real estate transactions, whether leasing an apartment or buying your dream home, you cannot escape the paperwork and agreements that are a part of the process. Buying a condominium, townhouse or single family house share this same reality, as rent to own housing involve paperwork and contracts that cover three topics:
- The Rental Agreement which outlines the terms of your tenancy while renting the property
- An Option Agreement to identify the time period and purchase option fee
- A Sales Contract to spell out the purchase price and terms of sale
Don’t be put off by the thought of dealing with multiple contracts. They are a logical part of the Lease Option process and, when structured correctly, they will provide both the buyer and seller with the protection each party desires for their transaction. And the beauty of agreements for rent to own properties is that they can be customized to best suit both the buyer’s and the seller’s situations!
And remember, before moving into a rent to own home, there will already be an agreement with the seller on the home’s sale price and other terms. This is covered in the Sales Contract. And either up front, or over time, the tenant-buyer will pay an option fee to the seller. The option fee is typically non-refundable, though this can be negotiated as partly refundable should the renter not be able to execute the final home purchase. The Option Agreement will spell out the details for each particular case. Either way, the option fee typically is negotiated to both encourage the buyer to complete the transaction and require the seller to not sell the home to another party.
Overall, agreements for rent with an option to buy homes can be written to meet the unique needs of both the buyer and seller. While the Agreements are all based on similar principles, they can be crafted based on the specific terms agreed by tenant-buyer and seller.
Rent to Own Process
Steve dreams of owning his own home, but his credit problems prevent him from getting a mortgage.
Steve calls RTO Alabama asking for help. We show Steve a home that he falls in love with.
RTOA negotiates a lease with Steve that includes an option to buy the home at the end of the lease.
Steve makes payments regularly and works with a mortgage broker so he can rebuild his credit and qualify for a loan to buy the house in the not too distant future.
Steve receives financing from the mortgage banker and uses the rent credit he's build up over the lease period as part of his payment.
Steve is now happy! He bought his dream home!
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