Let’s look at what rent-to-own houses are and how they work to assist you in making an informed decision.
Renting and buying come with various benefits and downsides. For example, buying a home might be challenging if you don’t have enough cash for a down payment, expected repairs, and closing charges. On the other hand, renting contributes very little to equity building, nor does it get you any closer to being a homeowner.
So, the question remains, is it better to buy or rent a home? Is there a middle ground between buying and renting that’s ideal for many people? Rent-to-own residences appear to provide the best of both worlds: but are they really worth it?
Rent-To-Own; What Is It?
A rent-to-own home is a unique home acquisition contract where one rents a property for a stipulated period with a choice to purchase it once the lease expires. It is categorized into a standard lease agreement and a buy option.
Your instalments are a little higher than the standard market price in this contract. The extra cash paid to the seller goes towards your equity (the percentage of the property you’ll own as opposed to the total amount you owe the seller at the end of the lease period).
Additionally, to keep the option to purchase a property, you may or may not be charged an “option fee” of 1 to 5 percent of the home’s value. Note that if you end up not buying the property at the end of the lease, you’re not refunded for your extra payments.
How Does Rent-To-Own Work?
Rent to own is way different from standard home-buying processes. Here you rent a home and work towards owning the same at the end of the lease agreement. Each month, you pay an extra amount that goes directly to the home’s down payment. Once the lease period is up, you’ll only pay the remaining amount to own the house fully.
What are the Benefits of Rent-To-Own Homes?
Here are some advantages that come with rent-to-own homes.
Huge opportunity to save for a home down payment
Rent-to-own can be an amazing idea to save for a down payment slowly. It also gives you a chance to test the house and decide if it’s really the place you want to live. The monthly payments are as per the contract agreement. However, it is greater than the market value since part of the surplus goes toward your down payment at purchase.
Saves on repair expenses
You can save on repair costs. Rent-to-own contracts often distribute responsibility for repairs between the landlord and the tenant. As a result, you can agree to pay for minor repairs while the landlord caters to major repairs. This proves advantageous, especially if you want to purchase a house but have insufficient funds to pay for big repairs.
It gives you an option to move or buy
Having sampled the home, you can either purchase the property at the end of the lease or move to a new home. Suppose you decide to obtain full ownership; you can easily access a mortgage loan from a reliable lender and follow home purchase standards. Any accrual balance is transferred to the lender.
Different Types of Rent-To-Own Contract
Rent-to-own contracts are categorized into lease-purchase and lease-option. Both of these choices share some similarities, such that they both allow one to rent a home for one to three years. And upon lease expiry, they either buy or move to another property. However, these two types of rent-to-own contracts have distinct features.
In this type of agreement, you’re required to pay the landlord an option fee at the beginning of a contract. This typically ranges from 1 to 5 percent of the full buying price. All the extra credit you pay every month goes towards your equity and can agree with the landlord on a fair price once the lease expires.
The first step in the sales process is to appraise the property to determine its value. In most circumstances, your option fee lowers the property’s purchase price. However, it is not a must for you to purchase the property. You might choose to walk away once the lease period is over. By doing so, you’ll forfeit your credits and option fee.
This lease-purchase agreement is similar to that of lease-option in that you lease the home for certain years and settle an agreed percentage of monthly rent towards the purchase. However, once you agree to this contract, you’re fully obligated to buy the house once the time expires.
Before signing the agreement, you agree on a given purchase price. You can discuss the price with the seller before entering the contract. However, the contract begins on the date it is officially signed. Signing a contract before gives you a clear insight into the amount you will need to loan to settle the remaining balance.
If you choose this contract, you’ll need to shop for a loan while your lease agreement is still active. Suppose you fail to get funding to settle the remaining balance by the end of the lease. You will be forced to give up the home and the accumulated rent credit. Additionally, the landlord can sue you for the breach of contract.
Rent-to-own is a great option because of the flexibility it offers with regards to a home purchase. Many people would never be able to own a home without this option. Also, rent-to-own can make it easier to buy a home if you don’t have enough saved for a down payment at this point in time.