We have questions from clients wondering about the Rent to Own option. Initially what is means, is that the renter/buyer cannot afford to buy the house in his or her current situation, the reason be not enough saving, bad credit etc. The renter are able to rent the property and from one to three years, they will have the option to purchase the property. The monthly rent can be a source of income for the seller and portion of the rent can go towards down payment. The process has its advantages and disadvantages. The contract between both parties needs to be very clear. The seller needs to decide the sale price and the rent for the property before entering agreement. Once signed, the sale price will be final even if the market value went down or up until the end of the rental term.
There is also an option fee and rent premium. The option fee works as a down payment once the renter agrees to purchase the property at the end of lease term. If the renter was not able to purchase the property, the option fee will become sellers income. The rent premium is rent slightly higher than of the typical rent. It will also go towards down payment. This is a chance for the buyer to raise their credit score.
If the agreement allowed, the buyer will be able to walk away from the deal if they found out the house is not suited for them after renting. The downside is losing the optional fee and rent premium but they might be losing more if they had actually bought the unwanted house.
The disadvantage for the buyer is the option fee is pay upfront. Usually a percentage of the sale price. It might difficult the the buyer to come up with that large amount of money before renting.
Another disadvantage is at the end when the contracts up, they buyer’s credit score still reminds the same and not enough income. The seller although gets to keep the option fee and premium rent, will be back where he/she started.
The seller won’t be able to sell their property if a potential buyer offered to purchase the property even with a higher price because the seller has a contract agreement with the existing renter/buyer.
Many sellers use the rent they received as the mortgage payment for their old home and once the payment stopped, the seller are forced into foreclosure, not being able to afford the mortgage.
Rent to Own is a complicated process. The seller and buyer need to have a clear understanding what they are getting into.