Tired of renting and longing to own your own home but not quite eligible quite yet? There is a possibility you can do both. It’s called: Rent-to-own.
While not always easy to find, once you do stumble on a rent-to-own home or apartment that works for you, there are some factors to consider before signing on the dotted line. Here are a few tips and pointers about how rent-to-own agreements work.
Types of Rent-to-Own Agreements
There are two main types of rent-to-own agreements; the first is called Lease Agreement with Option to Purchase. This type of lease requires the tenant to pay an “option fee” for the right to purchase a property at a later date. If they exercise that option, the seller is required to sell the property to the tenant and apply the option fee to the purchase price. If the tenant chooses not to exercise that option, they forfeit the option money.
Experts suggest option fees are typically a percentage of the purchase price (on average from 2 to 7 percent). If a tenant doesn’t have the cash, sometimes assets, like a car, can be used instead.
The second agreement is a Lease Plus a Purchase Agreement. This is when both parties agree on a fixed purchase price, or agree the purchase price will be determined with a future appraisal, as well as the future closing date. In other words, all of these factors are set from the start.
But as a renter how do you decide between a fixed price and a future appraisal price? Experts suggest it depends on the housing market as a whole. For example, in a rising market, a fixed price lets you have equity in the home even before making the purchase. In most other market conditions, an appraisal at the time of purchase may ensure you don’t pay over market value for the property.
Also, keep in mind if you have credit problems that need fixing or if your financing is less than stellar, experts suggest seeking a closing date at least 12 months ahead.
What About Monthly ‘Rental’ Payments
Another added benefit about being in a rent-to-own agreement — especially if you are a renter who often thinks your monthly rent payments are simply money lost – this agreement offers rent credits. Rent credits apply a percentage of your monthly rent to the purchase price of the home.
Who Fixes What?
You might be asking who fixes what when it breaks if you are in a rent-to-own situation. Well, rent-to-own differs from a traditional tenant/landlord relationship in almost all aspects. For example, maintenance and repairs are the reasonability of the landlord when renting the usual way. But not always the case with rent-to-own. Your rent-to-own agreement should specify beforehand who is responsible for what. Keep in mind, small repairs and regular maintenance is usually the responsibility of the tenant, while larger repairs remain with the landlord.
Who Benefits from Rent-to-Own?
In the end, the renter who benefits from a rent-to-own agreement is someone who does not currently have the money for a down payment or can’t obtain financing for any given reason. So, the good news: With the correct rent-to-own agreement for you, you could be a happy homeowner much sooner than you thought.