Rent to Own

So, what exactly is rent to own?  “Renting to Own” means that you are leasing or renting a property with an option to buy it at a future date at an agreed-upon price. This is also known as a “Lease Option” or an “Agreement For Sale”. The future price of the property is usually fixed at the time the Lease is signed. Also, there is an up-front payment and agreed upon amount to purchase the option when the time is up. The amount can vary and is dependent on the details of the individual transaction however, the typical minimum amount is $20,000. The monthly payment will be larger than market rent, and in some cases, the excess can be applied toward the down payment for the later purchase of the home. If you don’t exercise the option when the time comes, you forfeit the payments made, including the deposit.

RISKS OF RENTING TO OWN FOR THE BUYER

Individuals who rent to own may end up not being able to buy the home when the lease option comes due. This often has to do with the same reason they can’t buy a home through conventional lending. They usually cannot qualify for a home loan today but expect they will be able to qualify at a later date. Later, they find they still cannot qualify When this happens it’s because they never improved their credit, there is a lack of income or a lack of savings to have a large enough down payment. If this happens, you lose any option money you might have paid upfront or as part of your monthly payment. When dealing with myself and my experts we provide the information and coaching to help you diligently improve your credit. When following our program you will be in the best position to become a homeowner.

BENEFITS OF LEASE PURCHASE FOR THE BUYER

Here’s a recent example: A couple started renting to own just before the real estate market started to rise dramatically. In the 3 years of their term, the value increased beyond the initial agreed upon price. As a result, by the time the option was about to expire the home was worth much more than the option price. They exercised the option to buy and sold the house immediately, pocketing all the profits for themselves. Of course, they could have simply bought the home with built in equity as well. In another case, a handyman fixed up his house by redoing the kitchen and bathrooms and adding hardwood floors. This increased the value of the home beyond the value of the agreed upon price. He exercised the option and took over the house with over $25,000 in equity. When the home is worth more than the agreed-upon price, this is called being ‘in the money’; and you get to pocket the difference. On another note, tenants do not exercise
the options for two reasons:

• The option is not ‘in the money’ whether due to market conditions or deterioration of the home.
• The tenant’s financial difficulties that prevented them from buying a home to begin with were never fixed.

Lease options are targeted at people who want to own a home but who lack the cash down payment, good credit (due to divorce or bankruptcy for example), and/or income to qualify for a bank mortgage, yet have a solid monthly income and want to own their own home. Hopefully, during the time you’re living in the optioned house, you change your habits when it comes to paying bills and maintaining good credit and/or improve the property. If not, you may not be able to buy the home, even if it’s in the money. Talk to your bank for advice on how to improve your credit if you think a lease option is for you.

WHAT BENEFITS DOES LEASE PURCHASE HOLD FOR THE SELLER?

They can sell the house during a slow market. By being able to collect a larger monthly payment than they could obtain in a normal lease, the property “cash-flows” and they don’t have to come up with money out of their own pocket each month to make the mortgage payment. They get some up-front option money and if the buyer cannot exercise the option, they get to keep it.

HOW DO I FIND A HOME RENT TO OWN?

There are numerous ways. One is to make an offer to Lease Option an existing home for sale. This is usually difficult if you are inexperienced in contract law or don’t know why the seller would help you purchase their home in this way. This could require a lot of education on your part. Or the other way is to contact an experienced Realtor (like me!) to set up a free consultation and discuss your options.