Should you Rent to Own?
Did you know that there is a grey area between renting and owning a home? It’s called ‘rent-to-own’ and it might be the perfect choice for you if you are attached to your property or need an extra source of income.
How Rent-to-Own Works
The way it works is simple. A property that is rent-to-own is one that is leased to a tenant who has the right to buy it once the terms you agreed on come to an end. This also includes an ‘option fee’ that the tenant has to provide and which is basically the home’s value. This amount (which is typically between 2.5 – 7%) will make up the down payment on the home. The tenant has to agree to pay a fixed and fair price at the end of every month along with a premium called ‘rent credit’ which will also make up the down payment. This also includes the length of the lease which can go up to 3 years at most.
So, say you decide to enter into a rent-to-own agreement with Fred, a tenant. Fred places an option fee amounting to $5,000 in order to purchase the option to buy the property when the agreement between you two expires.
According to the value of the home and other properties, you will get monthly rent amounting to $1,000 before rent credits. Since Fred will own the property once the lease ends, he will also have to pay rent credits on a monthly basis for the down payment. Both of you also agree that $200 is a fair amount for the monthly rental credit so each month Fred pays you $1200 for the down payment.
Bear in mind that the rent credits and option fee are not refundable and your tenant should know this beforehand.
Benefits of Rent-to-Own
Renting-to-own is a great option if you don’t want to risk losing your hard earned savings on a down payment or if your credit score is not sufficient to acquire a mortgage. It might also be a good idea if you lost a home in the past to foreclosure or you need an additional source of stable income to support yourself. You can also lock in the price of the home as well so you’ll know exactly how much you will stand to profit at the end of the lease term.
In order to ensure that you are getting a good deal on your property, make sure that there aren’t any back taxes or any liens that the current owner incurred. Once the property comes into your possession, you will be responsible for paying them. It can also be a bit more expensive than your basic renting since the monthly payments will be larger because of the down payment.
The process can also be more complex compared to basic renting so if you decide to pursue this option, it would be a good idea to talk to a professional real estate professional before signing any contracts.
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