An alternative to a traditional agreement between buyer and a seller is the rent-to-own contract. In a typical sale the buyer will present an offer. If accepted, the deposit, payment and settlement will result in new ownership of the property. Rent-to-own or Lease-to-own is a different process. In effect, this allows the renter to eventually become the buyer. This is done through a different kind of transaction.
A recent article in RISMedia’s Housecall, by Rana Waxman, goes into greater detail to explain this process, by first explaining exactly what Rent-to-own means (Rent-to-Own: Is It an Option). In most cases, the term refers to a situation where the present owner promises to sell the property to the new tenant for a specific amount of money within a pre-determined time frame.
However, some agreements may not obligate the tenant to purchase the property when the time is up. It may simply give them the right to consider the offer. In all cases, words do matter. That is why it is essential that the contract be drawn up by a real estate attorney.
The potential buyer may move into the condo right away, although they do not own it. Therefore, it is imperative that the buyer purchase renter’s insurance. It may also be determined that the potential buyer maintains the property and makes any and all necessary repairs and take care of any maintenance issues.
Many of these leases may have certain state and local regulations, which must be stipulated and agreed upon by both parties. In many cases, a certain portion of the rent may be allocated toward future purchase or closing costs. There may also be a non-refundable “option” fee, which could range anywhere from 2.5 to 7%.
The actual purchase price should be written into the agreement and be locked in at the beginning. If that is the case, the buyer needs to apply for a mortgage for the entire sum. Some of this money may come from the rent proceeds and “option” money.
Is Rent-to-own is right for you? It might be a good option if your credit is not very good, or if you have incurred some debt that needs to be paid, or you are unable to get a mortgage at this time. Just remember, if you decide not to buy the property, the rent payments and “option money” are not refundable.
For the seller, Rent-to-own may be an excellent option, especially if you already have purchased another house or condo and need to receive income from the existing property. This will remove your listing from the market and give you a locked-in price at the end of the lease.
Before deciding if this is right for you, it is most important to do due diligence, understand the numbers and speak to knowledgeable real estate attorneys as well as a real estate professional.