ADSENSE
For many, the rent-to-own home may be the best option. Also called a lease-to-own house, the process works similar to a car lease.
Both renters and sellers need to be very clear about the contract they draw up before they agree to this arrangement. Renting to own has advantages and disadvantages.Sellers who have already bought a new house will have relief from paying two mortgage payments at once, and in a slow housing market with many homes for sale, this may be their best option. Buyers who can't yet afford a house may be able to get one more quickly.
A rent to own arrangement starts off as a traditional rental agreement.But the two parties agree to transfer ownership at the end of a specified period of time. The seller benefits from the higher monthly interest rates paid for the item, while the buyer benefits from the less restrictive credit qualifications.
The Basic Rights:
The term "rent to own" can be quite misleading. It implies you are renting a house and buying it afterwards. A rent to own contract can be dismantled into 2 parts: A lease arrangement and option to purchase. So to be more precise, rent to own is in fact renting a house now with the exclusive right to buy it at a fixed price sometime in the future .
Now a lease to own agreement sure seems like a good deal for the buyer... who gets a place to stay and reserves the exclusive right of buying it in the future. Of course there's never a free lunch in real estate, and the buyer has to fork out extra for these perks and privileges... in the form of extra rent (rent premium) and a lump sum for the option to purchase (option fee). No worries we will drill deeper into these costs below.
How Long and How Much?
Just like a normal property sale, the buyer and the seller will first have to agree on a selling price. Once the bargaining is over and the rent to own form is signed, this sale price will be locked in until it's time for the buyer to exercise the option to purchase. This option period is often between 1 to 3 years, which will be the duration of the lease as well.
Let's say we have a rent to own contract for a house with a selling price of $500,000 and an option period of 2 years. What happens is that the buyer will first have to rent the house for 2 years and once the 2 years is up, he or she will have the right to buy the house for $500,000 (regardless of whether housing prices have risen or fallen during that 2 years).
Of course, the buyer has to pay a price to enjoy this option... most folks call it option fees while lawyers label it as option consideration in a rent to own contract. Either way, they are the same thing and what matters more is how much it will cost. It is common for the option fee to be between 1 to 5% of the property's sale price.
If the buyer chooses to exercise his or her option to purchase, this option fee will become part of the down payment. If the option isn't exercised and the deal falls through, the seller gets to pocket the option fee as a consolation prize. Both ways the option fee is still non-refundable.
Rent Premium:
In a rent to own agreement, a buyer has to pay higher-than-market rent.
The rent premium works like this: If the buyer ends up buying the property, this rent premium graduates into a rent credit... which goes toward paying off the purchase price of the house. In eyes of a person (who exercises the option to purchase), paying rent premium is akin to building up equity in his or her future home.
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