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How Does Rent to Own Homes Work?

rent to own homes

A rent to own agreement may be the ticket you need to own your first home. If you dream of purchasing your own house but find it difficult to turn that into a reality, fret not. Most homebuyers such as yourself need a mortgage to purchase a house. However, to qualify for financing, you must have a good credit score or cash for a down payment. If you do not have both, the route to getting your title may be difficult.

Thankfully, you can count on an alternative solution which is eventually purchasing what you rent. So how does rent to own work? The concept is easy because you need to rent a home for a specific time frame. Then, later, you get the option to buy the property before the lease agreement expires. Thus, any rent to own agreement comes in two parts: the typical lease contract and the clause that provides the renters the option to purchase.

If you are eager to learn more about this process, continue reading below for a rundown on the whole process and what elements to keep an eye out for. This approach to homeownership is more complex than renting or getting a mortgage. As such, you must take added precautions and do your research to protect your interests. With the right information, you can assess what a genuinely good deal is. Working with data is the only way you can make an educated decision on your future rent to own home.

Take Note of Upfront Fees Which Are Non-refundable

As the prospective buyer, you must pay the seller a one-time fee that is usually not refundable. They usually dub this as an upfront fee, option fee, option consideration, or option money. This non-refundable fee gives you the privilege to buy the home you rent in the future.

Noteworthy, you can negotiate this fee with the seller as there is no standard industry rate. Still, in general, the fee ranges from 1% to 5% of the purchase price. If you have excellent haggling skills, now is the time to strike a deal with the seller. Of course, getting the lowest percentage works best to your advantage.

The Two Different Rent to Own Contracts

You will encounter two different types of rent to own contracts in the market. These are the lease-option versus the lease-purchase. Some agreements offer flexibility, making them more consumer-friendly than others out there, so read the fine print. Let’s take a look at the difference between these two below:

1. Lease-option

As the name implies, this gives you a choice. Here, you have the right to buy the property, but it does not legally obligate you to do so when the lease expires. If you choose not to purchase the property when your lease ends, your option only expires. Hence, you can move on without being obliged to pay rent or buy the home. However, this agreement means you will forfeit any upfront fees you pay, along with the rent.

2. Lease-purchase

In contrast, a lease-purchase is the stark opposite. This agreement is more complex filled with legalese. But the bottom line is you become legally obligated to purchase the home when the lease expires.

Thus, before you sign any rent to own agreement, it would be prudent to have a real estate lawyer review your contract. They are well-versed in this area and can explain complex clauses that you might misinterpret. You must understand the contract terms and stipulations before you sign any binding agreement. This means you know exactly what you are getting into so you can protect your rights.

On top of this, you will need to speak with a lending firm. They can help you understand what you need to qualify for a loan when the lease agreement expires. After all, you will still eventually need financing to purchase the home.

The Entire Rent to Own Home Buying Process

Once you have found your ideal rent to own or lease to own home, you make an agreement with the owner. These deals are common during real estate market slumps. When the owners have difficulty selling the property outright, this gives buyers a viable way to achieve homeownership. Check out the process below:

1. Obtain and Evaluate the Agreement

The first step for finalizing everything is working out the details with the seller. Next, there will be a drafted lease-option or lease-purchase agreement that you both need to sign. This becomes your rent to own contract. It will include many details such as:

  • Determining the purchase price: You can agree on the final sale price of the home upfront to lock in the price in case the market begins an upward trend. Alternatively, you can pay the fair market value when the rental agreement ends.
  • Specific lease dates: Your contract will also stipulate how long you will rent the home before purchasing it. Typically, the term is usually Two to five years.
  • Rental fees and credits: It will also indicate how much rent you will pay each month and how much of these payments will reduce the home’s final sale price when the term is up. If part of the rent will be a credit towards buying the home, you may find that the rental price is slightly higher than the standard going rate in the area to make up for the credit. Again, make sure you understand what you are getting into.
  • Home maintenance stipulations: One important thing you must consider in your contract is who oversees the home maintenance responsibilities while you are renting. The agreement must specifically state who will take responsibility for routine maintenance like mowing the lawn and expensive repairs like complex roofing or plumbing problems.
  • Other prospective fees: This may also include expensive homeowner association fees, homeowners insurance, and other details. Notably, local rules and regulations may complicate this. For example, in some municipalities, the law requires landlords to perform specific duties regardless of what the rent to own agreement states.

Again, you must seek the advice of a real estate lawyer so you can have an ally to assess the contract before you sign anything. A qualified person can help you fully understand your rights and obligations. You may want to negotiate some details if they are not favorable.

2. Pay for a Home Appraisal and Inspection Report

A rent to own agreement is also a major decision that will affect your finances for the long haul. After all, if you choose a lease-purchase agreement, you have no other choice but to buy the home. Similarly, going with a lease-option means you still consider purchasing the property down the line. Thus, a portion of your rent may go towards the final purchase price.

Since these two lease contracts require a big monetary expense, you should treat a rent to own agreement with the same precautionary measures as making a traditional home purchase. Besides, you have the same intention either way, which is to eventually own the home.

  1. Independent appraisal

For best results, you must request an independent appraisal of the property before you lock in on the purchase price and sign the contract. After all, you do not want to pay more and get ripped off in the end. The appraisal report will give you the true fair market value of the home based on the current prices.

Keep in mind that you are obliged to pay this price if you agree on a lock-in purchase price upon signing. If the market is on an uptrend, this will be favorable for you. However, if the economy goes into depression and the home is not worth as much by the end of the lease, you may still need to pay that amount in a lease-purchase. Remember, any lender will not pay more than the appraised value. Whatever is the difference, you must take it out of your own pocket.

  1. Complete home inspection

In the same token, you must have a complete home inspection done by a qualified professional before you sign the agreement. This service will reveal any untoward issues about the house. After all, you do not want to get saddled with a property that needs many expensive repairs down the line.

Moreover, to protect yourself from scams, be vigilant in doing your research. You must take note of the following:

  • Property taxes are paid to date.
  • There are no liens on the property.
  • Ensure the seller is the true owner who can legally rent to you.

To protect your interest, request the title of the property or the most updated mortgage statement. You should also review the property tax bills and receipts. Do all these before you pay any fees and sign the agreement.

3. Settle the Option Fee

After you sign the agreement, you pay for the non-refundable option fee stated above. With this, you get the first right to buy the house when the lease ends. It prevents others from buying the home while you are renting it. This is akin to placing a down payment for the home because if you choose to purchase the house, they can deduct the option fee towards the final purchase price.

However, if you decide not to buy the property at the end of the lease term, you will lose all the money as it is not refundable. Noteworthy, in some lease-purchase agreements, you may end up not paying the option fee. After all, you are already getting into a binding contract that says you will purchase the house. Thus, you have no option to back out whatsoever. Clearly, you must understand your rent to own agreement, so you know what your financial obligations are.

4. Pay Monthly Fees Without Delays

It is vital to make payments on time, following the terms outlined in the contract. Any late or missing fees could make your agreement void. As a result, you will lose the money you have partially infused into the property. In case your late payment does not void the contract, the late payment may not be added towards the final purchase price of the home.

On top of that, paying on time will help you continue to build a good credit score. In addition, this will aid you in securing the best mortgage rates when your lease ends. Once again, have your real estate lawyer explain what will happen should you miss any payments or pay late fees because they will word them in legal jargon in your contract.

5. Look Out for Mortgage Rates

Finally, when you are nearing the end of the rent to own agreement, you must shop for a mortgage like a traditional home buyer. Do not wait before it is too late, as you will need time to prepare documents to secure the loan. Besides, you need to do your research because mortgages are not the same since lenders have different requirements.

You will find that companies may quote different interest rates, terms, and other closing costs. When you give yourself ample time to shop around, you can save yourself thousands of dollars. Working with the right lending firm with your best interest at heart can make a world of difference in your homebuying journey. Thus, prioritize searching both the lender and the prices.

Make an Informed Choice

Treat the rent to own process with the same due diligence as you would if you are to immediately buy a home. You must assess the area first and compare prices with other homes to ensure you are truly getting a great deal. You must also research the seller’s history to avoid any potential scams.

Moreover, evaluate the contract to ensure the terms are in your best interest. For example, it is better to choose a lease-option agreement over a lease-purchase if you want flexibility. However, if you have your heart set on the property and only need more time to work out your finances, a lease-purchase may be the best choice.

Do not forget to get an appraisal and inspection report. Make sure there are no liens on the property, and the taxes are paid on time. If you need assistance looking for a property, contact our team at RI Home Store. We can help you keep an eye out for the best home deals that fit your lifestyle needs and budget.

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