HOW RENT TO OWN WORKS
If you've been thinking recently about buying a home but are unsure of making such a large investment when you've never done so before, you should consider the rent to own option that's available to prospective homeowners. By going this route, you would be able to rent a home with the option to later purchase it if you enjoy living there. While you're still weighing all of your options, you should know more about this process, how it works, and the benefits that you could obtain from it.
What Is Rent to Own Housing and How Does It Work?
This option allows individuals and families to lease a home for a specific period of time, which could be anywhere from 1-5 years. Once you've made this rental agreement, you will have the option of buying the home altogether before the duration of the rental agreement has run out. Keep in mind that lease option housing allows you to choose whether or not you'd like to purchase the home by the end of the rental agreement. On the other hand, lease purchase housing requires you to buy the home at the end of the initial agreement.
The contracts associated with this method of renting and eventually owning a home can differ in a variety of ways. In most cases, you will be able to choose when and if you buy the home during the contract. As mentioned previously, the duration of time that you can lease the house before you decide whether or not to purchase it can be anywhere from 1-5 years depending on the contract that you sign. When you pursue lease option housing, a small percentage of the rental payments that you make over the duration of the agreement will likely be applied to the overall purchase price, which counts as a down payment. For example, let's say that your rental agreement lasts for four years, during which you will need to pay a monthly rent of $1,500. If $250 goes towards your down payment every month, you will have paid $12,000 towards your down payment by the time you make a decision on whether or not to buy the home.
It's also important to understand that the eventual purchase price of the home depends on what's stated in your initial contract. It's possible that the contract will stipulate that the cost of purchasing the home will be the same as it was when the initial contract was signed. For instance, if the purchase price was set at $210,000 when you first signed the contract, that will be the price you pay if you choose to purchase the home at the end of the contract. There's also a chance that the price you pay for the home will be based on the value of the property at the actual time of the purchase.
Both of these options have their benefits. If you lock in the price at the beginning of the contract, any increase in the value of the home while you're renting it won't be applied to the eventual purchase price. On the other hand, you also won't benefit from a reduction in the value of the home while you're leasing it. The other option can be a riskier one. While you are able to benefit from any reduction in home value over the course of the lease agreement, a possible increase in home value will cause you to pay more.
Types of Contracts
You will have two options for rent to own housing, which include lease option and lease purchase housing. When you sign a lease option agreement, you will be required to pay a small sum of money at the onset of the lease term. This payment will be nonrefundable and will be a percentage of the purchase price of the home. If the property costs $200,000 to purchase and the contract requires a 2% payment at the beginning of the lease agreement, you will be required to pay $4,000 in order for the rent to own agreement to be finalized. The money you pay at the start of the contract will also be applied to the down payment if you choose to buy the home. If you decide against purchasing the home, you will lose this money.
A lease lease purchase contract is one where you will be required to purchase the home at the end of the lease. However, you won't need to make an initial payment at the beginning of the contract, which should save you some money. The main reason that lease option housing is considered to be the best of the two possibilities is that it eliminates the risk of entering into such a contract. When you have the option to purchase the home at the end of the contract, you can always back out and decide against buying the property once the lease contract comes to an end. This isn't possible with a lease purchase contract, which means that you would be required to buy the home even if you couldn't afford to do so.
Benefits of Rent to Own
There are a wide array of benefits that you'll be provided with if you choose to rent a home before owning it. For one, this method of buying a home makes for a much simpler process than the standard method. If you've never purchased a home before, the home buying process is always going to be a time-consuming process that can cause a substantial amount of frustration. By choosing to rent the property before possibly purchasing it in the future, you can slow down the process and take your time to live in the home before you determine if it's the right place for you. This is also a great option for prospective homeowners who may not have the amount of money that it takes to make a large down payment on a home. While a payment is required at the beginning of the contract, this payment is still much smaller than you would typically need to pay when buying a home.
If you currently have mediocre or poor credit, this option allows you to have a place to live while also giving you time to improve your credit before buying the home. It's important to note that other benefits are possible depending on what you negotiate for the contract. Some of the factors that you can negotiate before signing the contract include the purchase price of the home, the monthly rent payments that you'll need to make, and who will be required to perform maintenance for the house and the surrounding yard. Keep in mind that you should still perform extensive research before entering into this kind of contract. You don't want to choose to live in a home that requires numerous repairs just for it to be livable. As long as you know exactly what you're getting into, this method of renting and owning a house can be highly beneficial for you.
Additional Aspects of Rent to Own Housing to Consider
There are some additional aspects of this process that you'll want to nail down before going forward with it. For one, make sure that your contract stipulates the exact percentage of your monthly rental payments that will go into your eventual down payment on the home. While some of these contracts will include 25 percent of the rental payments in the eventual down payment, other contracts won't put anything towards the down payment, which is not something that you should consider. The monthly rent that comes with these agreements is typically higher than the going rate for a standard apartment or home in the area you live in, which you should definitely keep in mind.
You also need to focus on who will be required to take care of the maintenance around the house, which includes mowing the lawn and making any necessary repairs. It's important to understand that this method of renting a home before you own it isn't the same as renting an apartment. You'll want to read the fine print of the contract to make sure that the entire upkeep of the home isn't left to you. The full requirements for maintenance and repair around the home should be clearly detailed within the final contract you sign.
Before you select a home that you would like to rent before you own, you should make sure to do your homework about the property. Even though you'll have the ability to back out of purchasing the home at the end of the lease agreement, you'll still want to live in a good place for the duration of the contract. Consider hiring a real estate attorney who can help guide you through this process and can make sure that the details of the contract aren't unfair to you.
Once you've been provided with a finalized contract to sign, it's important that you conduct some research on this contract. You should understand every facet of the agreement before signing it, which includes how the purchase price is officially determined, what the rent payments are, if pets are allowed, and who pays property taxes. Before you enter into this agreement, the home should be appraised and inspected. An appraisal will be able to show you the actual value of the home, while an inspection will give you information about the quality of the home and if it has had any recent repairs. With this information in hand, you should be ready to pursue your dream of owning a home.