“Should I buy a house or should I continue renting?” This is a question asked by many. People usually hold off the home-buying process because of how challenging it may be. So can rent-to-own housing help those with their hearts set on homeownership? What are rent-to-own homes? Let’s take a closer look!
Let’s Talk About Rent-to-Own Homes
Rent-to-own properties allow people to first rent a property before purchasing it. For this reason, the rent-to-own rental agreement typically contains a provision. Depending on how the provision is worded, the tenant will be either required to purchase the property or given the choice to do so if they want. People also need to keep in mind that a portion of the rental typically money will somehow be applied to the purchase of the property. However, that doesn’t change the fact that every rent-to-own contract will be different.
Who Can Take Advantage of Rent-to-Own Homes?
People’s situations are different. This is why some people may prefer the rent-to-own home buying method more than others. So who may benefit from this option? A) These could be people who are experiencing difficulties with the standard home-buying procedure. B) Those who cannot afford the down payment and need time to collect it. C) Those who have a bad credit score and could use extra time to work on it. In other words, this option mainly works best for people who are not ready financially or for other reasons. Thus, the rent-to-own option simply gives people the chance to improve their current circumstances.
Costs Associated With Rent-to-Own
There could be upfront fees that are not refundable. That includes an option fee. Generally, buyers are able to get a good deal on the option fee. Nevertheless, the fee typically ranges from 1% to 5% of the cost of the house. Like we said, this fee is non-refundable. However, due to the option fee, the tenant has the option of later purchasing the property. This is one of the important reasons that people should be prepared for any additional costs that come along with this type of agreement.
The Preparation Prior to the Agreement
People need to weigh the pros and cons of their agreement before signing. In fact, there are a few things that need to be done before reaching the contract stage. That is, people have to do their own thorough research, get answers to any concerns, and know exactly what the agreement means. To add, it’s also crucial that people analyze the property and the seller just so they don’t get surprised later on. Having said that, the most important thing anyone could do before purchasing a home is to hire a real estate lawyer!
The Process of a Rent-to-Own Home
Like we said, the traditional home-buying process can be challenging. This is why some people never consider buying a house. Having said that, securing a rent-to-own property is not the hardest thing to do. Nevertheless, before purchasing a rent-to-own house, people should know the following:
- Knowing What to Expect When Buying the Property
- Reaching an Agreement on the Property’s Purchase Price
- Having a Detailed Awareness of the Maintenance Procedures
- Putting Paid Rent Towards the Principal Balance
Knowing What to Expect When Buying the Property
It’s important that people know what they’re getting into before signing a contract. That’s because the initial agreement will specify what the requirements are for the tenant. Let’s say a tenant agrees to a contract that requires them to purchase the home when the lease expires. Thus, they will be required by law to do this. That said, lease agreements that give the tenant the choice to purchase instead of being committed to do so are generally more preferred. It’s because in the event the tenant can’t secure funding, this might become an issue. In fact, penalties may be imposed on a renter if they fail to buy the home as agreed upon.
This is why more flexible contracts are preferred by some because they give more freedom to the renter. So if the tenant decides not to use the option to purchase, they will be required to vacate the property, just like in any regular rental contract. If that happens, it is not unusual for the tenant to lose any money up to that point that was paid in rent.
Reaching an Agreement on the Property’s Purchase Price
Not all rent-to-own agreements are the same, meaning that things will vary based on the situation. Thus, when it comes to deciding the price of the property, the parties may agree on a price at the moment the lease is signed. In this case, the decided price will generally exceed the value currently present in the market. In other situations, the property price will be decided after the lease ends. Having said that, the tenant needs to have an overall idea of the timeframe and purchase price of the property.
Having a Detailed Awareness of the Maintenance Procedures
People should be fully aware of the maintenance requirements that are outlined in the contract. That’s because the maintenance duty may fall on renters. Yes, house maintenance is often taken care of by the landlord. Or at least that is the case for a typical lease arrangement. Nevertheless, the situation with rent-to-own homes is sometimes different, with tenants handling the maintenance. If the tenant’s intentions are to someday purchase the property, this is most likely how things will go down.
Putting Paid Rent Towards the Principal Balance
The renter might be allowed to use all or a portion of the option fee for the purchase price. Also, people should know that the rent-to-own rental period is not the same as a typical rent. Essentially, the rent paid for a rent-to-own will be utilized in a non-traditional manner. We’ll take the case of a tenant who has been paying $500 in rent monthly for three years. Basically, this renter would have contributed $3,600 to the cost of a property if 20% of their rent was used for it. This is, of course, just an example, and the numbers will differ based on the property.
Essentially, all rent-to-own contracts are unique. This is why people should do their own research and pick the option that suits them best. Yes, finding and buying a home can be challenging. However, a rent-to-own home may be a useful option for many people.
Basically, a rent-to-own is a good opportunity for people who are not ready to buy a house just yet. With extra time, individuals can concentrate on building their credit and budgeting for a down payment. Having said that, the initial contract decides what the tenant can expect in the future. This is why hiring a real estate lawyer may really benefit some people. The good news is that those who are struggling financially may still make the dream of homeownership come true!