Renting is the option you have if you don't have the cash to purchase a house or a mortgage to finance your home buying, right? Not necessarily so. A rent-to-own home is also an option.
The rent-to-own process is much more complicated than renting. However, it allows you to buy time to save up until you are ready to purchase the property you are renting.
What exactly is a rent-to-own home?
Rent-to-own homes: The basics
Rent-to-own is an agreement in which you agree to rent the property for a specific period before purchasing it.
The specific period can be a few months to several years. Typically, the seller will hold a certain amount of the monthly rent. That amount will be credited towards the future purchase of the property.
Lease-purchase vs. Lease-option
A rent-to-own agreement can either be a lease-option or a lease-purchase. With a lease-purchase, a tenant is allowed to rent the property for a specific amount of time. The renter then agrees to buy the property once the lease is up.
A lease-option is similar to lease-purchase in much of the terms of the agreement. The main difference is that the tenant is in no obligation to buy the property once the contract expires.
A lease-option is just buying the right to purchase the property before the lease expires. The seller then is obligated to sell the property if the tenant decides to exercise his right.
How the rent to own process works
A typical rent to own transaction will involve the following:
The purchase price. The rent-to-own agreement will indicate how and when the property's selling price will be decided. The purchase price may be determined according to the property's current value or project value.
The rental payment. Another important component of the rent-to-own contract is the amount of rent that should be paid every month. In general, rental payments under a rent-to-own agreement are higher than the prevailing rent prices in the area. That is because a certain percentage of that rent will be credited if the tenant decides to buy it.
Property maintenance. Under this agreement, the landlord/seller may ask the tenant to cover the upkeep and other costs. This amount may include maintenance and repairs, HOA fees, and property taxes.
Term of the lease. Once the lease ends and the tenant decides not to purchase the property or turn out unqualified for financing, the option to buy expires. In general, rent to own terms is negotiable. Currently, there is no standard process when it comes to rent-to-own agreements as there is little regulation about it.
Option money. Option money refers to the one-time, non-refundable fee paid upfront. It gives the tenant the option to buy the property eventually. While there is no standard amount for option money, it is typically a percentage of the property's purchase price.
The closing process. If the tenant decides to purchase the house, he needs to have financing secured by the end of the lease. The seller will then schedule a closing date, which will be the start of the new ownership.
