As a real estate expert, I get calls almost daily from buyers asking about rent to own. There are a lot of misconceptions out there. Sellers consider rent to own for a few different reasons, maybe they are having trouble selling the house and can’t afford the mortgage payment and a mortgage payment at their primary residence. Maybe there have been long term tenants that would like to purchase the home, they have a great rental history but can’t yet get a mortgage, the seller might see rent to own as a benefit, rather than having the tenants leave and put the home on the market…those are just a couple of scenarios that rent to own can happen in. It is not as common in a good seller’s market, like we are in today.
Why would buyers consider this option? Usually this only happens if buyers can’t qualify for a mortgage but want to work towards owning a property. Sellers that are willing to do this, can be hard to find. Most buyers don’t realize that in addition to the monthly rent and security deposit, there is usually a down payment deposit as well. This is usually 1 to 5 percent of the purchase price and will be more than their rent. The rent amount is usually higher than a normal rented property. If you can’t purchase, or decide not to purchase when it comes time to the “own” part, you generally will forfeit the down payment amount you paid and the amount you paid thus far in rent, does not get returned to you. So at that point you will have paid above market rent, a lump sum, and have nothing to show for it. Quite often in this scenario the tenants/buyers are responsible for repairs and maintenance during the lease term and any money or sweat equity you put into the property will not be reimbursed, if you can’t close when it comes time to “own.” Now, anything can be negotiated, but this is what I see most often.
Sellers that consider doing rent to own should contact an attorney so they can understand the laws. You should make sure the person renting/buying the home has spoken to a lender and has a realistic idea of what it will take to qualify for a mortgage and how long that will take. The seller should be following up to make sure the buyer is doing what they say they will. Whatever sales price you decide on should be realistic and ideally close within a year…if you do a long term rent to own you risk the market changing and the property not appraising for what you agreed upon 2 or 3 years prior. Sellers should do background and credit checks and make sure all the rules are laid out clearly. Sellers should always require a down payment deposit.
Buyers, this is generally not your best option, but if it is your only option make sure you speak with a lender and figure out realistically how long it will take to be able to purchase the home. Make sure you are doing everything they tell you to. Do not stick too much work into the property until you own it. Understand that what you are signing is a contract, make sure you understand what happens if you default. I strongly suggest instead of focusing on finding a rent to own, focus on finding a lender that will guide you in the direction you need to be to be able to purchase a home, without having to do rent to own, and focus on getting there.
If you need help finding a lender that can set a plan for you and help you understand what you need to do to be able to purchase, contact Amy at 920-296-3013 or firstname.lastname@example.org