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Renting to Own 101

Wanting to become a homeowner, but do not have the means to buy now? Renting to own may be an option for you—here’s everything you need to know

If you aim to become a homeowner in the future but are not quite financially ready to make the down payment, there is an option available that you may not currently be aware of: renting to own. The rent-to-own model entails a portion of a tenant’s monthly rent payment is set aside for a down payment to eventually buy the home they are renting. For some, this approach can be appealing, as it allows a renter to establish their credit and amass substantial savings over time. For highly competitive markets with inflated home loans, this can also be a more viable choice.

How Rent-to-Own Works

Often, the intricacies of a rent-to-own (or lease-to-own) arrangement can vary, as buyers and sellers are able to negotiate different terms and standards for each situation across vastly different markets. Generally, with these types of agreements, the tenant, or buyer, pays the owner, or seller, monthly premiums with an intent to purchase that particular home in the future. In some instances, agreements can offer the tenant the option to buy. That’s why it is so important for a renter to decide if they would rather commit to a lease-option agreement or a lease-purchase agreement when entering a rent-to-own contract. These are also referred to as an obligation-to-buy agreement and an option-to-buy agreement.

From a seller’s perspective, the lease-option agreement can be desirable if you are having trouble selling your home, as the tenants will likely take better care of a home they may be owning someday. Plus, if the tenants back out of buying the home, the seller will likely be able to keep the rent premiums. On the flip side, the seller may not be able to list the house until the lease period is over, and if the home’s value should increase, the seller would still need to sell for the potentially lower agreed-upon price. These are all important considerations to factor in when deciding to rent to own.

Creating a Rent-to-Own Agreement

If you decide this model is best for your situation, the rent-to-own contract, whether a lease purchase or lease option, can be included in the lease agreement or developed as a separate document. When drawing up or looking over this particular document, it’s important to carefully review the following factors:

  • Length or term of the lease, which generally ranges between two to five years
  • Key payment deadlines for rent and any rent premiums
  • Monthly rental cost, which may be higher than market value since a portion of the money will go toward the purchase of the home
  • The option fee. This is a one-time, usually non-refundable upfront fee that gives you the option to buy the house in the future. This is usually between 2 and 7 percent of the purchase price.
  • The actual purchase price
  • The responsible party for monthly payments, including any property taxes, HOA fees, insurance, as well as maintenance while you are renting

There are a lot of considerations when creating or reviewing a rent-to-own contract, and an experienced real estate attorney is a valuable resource to have, as they can review the contract and guide you through the entire process. The team at ALA can help you better understand all that is expected of you throughout the process. Contact us today.

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