Real Estate

Rent-to-Own Properties and How it Works

Rent-to-Own Properties and How it Works

Rent-to-Own Properties

At some point, if you have to put your house up for sale and time passes by without getting offers from buyers or you get offers from people who do not have the down payment. Then the question that nags at your mind become, how do I sell this house?. In many cities where renting is more cost-effective than buying, purchasers may just be uninterested in buying a property, while for others renting to acquire a home is the greatest option.

This arrangement, also known as a lease-to-own house, is similar to that of a car lease where renters pay a fixed amount each month to live in the property, and at the end of a defined period usually three years they have the option to buy the house.

However, before agreeing to this arrangement, both tenants and sellers must be very clear about the agreement they draft. Rent-to-own has its merits and demerits for both parties. And as for sellers who have already purchased a new home, this arrangement will save them from holding on to the house for too long in such a slow real estate market as well as save them from paying two mortgages.

How a Rent-to-Own Property Works

Perhaps your apartment has been on the market for months, and you can no longer keep up with the payment of both your old and new mortgage. You want to sell as soon as possible, but you don’t want to lose money. You may have to consider turning your existing house into a rent-to-own property.

After you get an interested party, you as the homeowner must decide on the appraised value and lease you will charge for the residence before agreeing. Both amounts are negotiable, just as they would be in a conventional transaction, yet both seller and purchaser should keep in mind that once they sign a contract, the house’s sale price is fixed until the conclusion of their renting term, which usually lasts between a year to three years. The initial agreed-upon price is definitive, regardless of whether other property prices rise or decline during that time.

In addition, renters must pay an option fee and then a rent premium. The option fee is a fixed sum paid by the renter to the seller, which becomes part of the down payment if the renter buys the residence at the end of the lease tenure and it becomes a profit for the seller if the buyer doesn’t eventually purchase the house at the expiration of the lease tenure.

Rent premiums are a little more than standard rent, with a portion of the money going toward a down payment. Typically this is an excellent option for purchasers who do not have the necessary credit score or funds to purchase a property on their own as well as for the seller too, who is anxious to get rid of the old house and earns this money regardless of whether the house sells when the lease time ends.

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Merits and demerits for the sellers

Sellers might secure a better price at the start of the deal if house prices are declining, but he is out of luck if a new potential buyer comes along who wants to buy the house for a higher price because he must honor the signed contract with the renter.

Renters who want to buy have a better attitude about their living place and neighborhood. Instead of living in a place, they’ll leave in a year or so, they’re making plans for the future.

If a renter terminates the arrangement before the end of the term, the seller retains the option fee and rent premiums as income. Yet he goes back to the same situation of not having a buyer for the property and this could be challenging for some homeowners who simply want to be rid of the previous home.

Most often sellers utilize the lease payment they receive to pay off their previous home’s mortgage, which relieves them of financial pressure. However if the tenant defaults and they can’t afford to continue the payment of the mortgage, they run into the risk of foreclosure.

Benefits and downside for buyers

In the course of their rent, the buyer could build up their income and credit score and decide not to buy the property anymore, especially if they noticed a major issue with the residence. They could leave at the end of their lease or before even though they stand to lose the rent payment and the option fee paid as a down payment towards the purchase of the house.

The option fee must be paid by the buyer, this is usually a percentage of the home’s agreed-upon sale price running into thousands of dollars. Although this money will go toward a down payment, saving so much money before renting can be difficult.

Most agreements cancel the rent credit for that month if the buyer is just one day late on a month’s rent payment because if a three-year renter receives a $200 monthly rent credit and the buyer missed three rent payments per year, the buyer would have $1,800 less for the down payment at the end of the lease period.

For this reason, a buyer must always pay on time in a rent-to-own deal because the residence may be foreclosed if the seller fails to pay the initial mortgage, forcing the buyer to relocate.

There is the probability that the buyer due to poor credit, insufficient down payment, and income might still be unable to procure the house at the end of the lease.

The Author

Ajisebutu Doyinsola

Doyinsola Ajisebutu is a journalist and prolific writer who takes a special interest in Finance, Insurance, and the Tech world.