How Does Rent-to-Own Work? A Non-Traditional Path to Home Buying

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Typically, when you want to buy a home, you need to apply for a mortgage from a traditional lender who will then evaluate your application and either approve or deny your loan request. However, if you’re not quite ready to take out a mortgage or if you have less than perfect credit, there may be another option available to you – rent to own.

Despite the name, you’re not actually renting the property. Rent-to-own is a unique type of home purchase agreement that allows you to lease a property for a set period of time before having the option to purchase it at the end of your lease. This can be a helpful option if you are working on repairing your credit or saving for a down payment. Rent to own allows you to build equity in a property without having to obtain a mortgage.

If you’re thinking about entering into a rent-to-own agreement, it’s important to understand how the process works so that you can be sure it’s the right fit for your situation. Here’s what you need to know about rent-to-own contracts and how they work.

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What Is a Rent-to-Own Contract?

A rent-to-own contract is an agreement between a tenant and a landlord that gives the tenant the option to purchase the property at the end of the lease agreement period. The contract will specify the purchase price of the home as well as the length of the lease. Typically rent-to-own leases are one to three years.

During the lease period, the tenant will be responsible for paying monthly payments for rent as well as any maintenance and repairs on the property. The landlord may also require the tenant to pay a portion of their monthly rent into an escrow account. Oftentimes, this can be used towards the purchase of the property at the end of the lease.

At the end of the lease period, the tenant will have the option to purchase the property or walk away from the deal. If they decide to purchase, they will use the money in their escrow account to help with their down payment. If they decide not to purchase, they will forfeit any money that has been paid into the escrow account.

It’s important to note that a rent-to-own contract is not the same as a lease option.

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What is the Difference Between a Lease-Option and a Lease-Purchase?

There are many different types of rent-to-own contracts, and the specific terms will vary depending on the agreement. However, there are two main types of rent-to-own agreements – lease options and lease purchases.

A lease option gives the tenant the right to purchase the property at the end of the lease. However, it does not require them to do so. With a lease option, the tenant is typically only responsible for paying rent during the lease period. Also, they will not have to come up with a down payment when they’re ready to purchase the property.

A lease purchase, on the other hand, requires the tenant to purchase the property at the end of their lease. The purchase price is agreed upon upfront. Typically the price is higher than what you would pay if you were buying on the open market.

Is Rent-To-Own Legit?

It depends. There are plenty of websites that claim they have the latest and greatest list of rent-to-own homes in your area, but many of them are scams. If you’re working with a reputable agent, they should be able to help you find legitimate rent-to-own opportunities.

However, keep in mind that oftentimes, the owner of a property who is looking to sell just wants to get the process over with and rent-to-own contracts can take a long time to complete. So, finding a good opportunity may prove difficult. In fact, in some cases, the contract may be structured in a way that disproportionately benefits the seller more than the buyer, so it’s important to have an experienced agent on your side who can help you negotiate a fair deal.

Before signing a rent-to-own contract, it’s also important to consult with an experienced real estate agent or attorney to ensure that the contract is legitimate and fair.

Benefits of Rent-to-Own Contracts

There are a few benefits that can come with entering into a rent-to-own contract. For tenants, it can provide a way to become a homeowner even if they don’t yet have the credit or income needed to qualify for a mortgage. It can also allow them time to save up for a down payment or repair their credit so that they will be better qualified to obtain a mortgage in the future.

For landlords, rent-to-own contracts can provide a way to sell a property that might otherwise sit on the market for an extended period of time. It can also provide a steadier stream of income, as the tenant will be paying rent even if they do not ultimately purchase the property.

Rent-to-own contracts can also benefit both parties by giving them a chance to get to know each other and see if they are compatible before entering into a more traditional long-term lease or purchase agreement. This can provide peace of mind for both the landlord and tenant, as they will know that they are entering into a contract with someone that they are compatible with.

Drawbacks of Rent-to-Own Contracts

There are also some potential drawbacks to be aware of before signing a rent-to-own contract.

Be Prepared to Pay a Large Down Payment Upfront

When you enter into a rent-to-own contract, you will likely be required to pay a large sum of money upfront. This money will typically be used as a down payment on the property and will be non-refundable if you decide not to purchase the home at the end of your lease.

For example, let’s say you’re looking at a rent-to-own property that costs $200,000. The contract may require you to pay $5,000 upfront as a down payment, which means you’ll still need to obtain a mortgage for the remaining $195,000.

If you’re unable to get approved for a mortgage or come up with the remaining funds necessary to purchase the property at the end of your lease, you will forfeit any money that you’ve paid into the deal and will likely be required to move out of the property.

As such, it’s important to be absolutely sure that you’re prepared to purchase the property before signing a rent-to-own contract.

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You May Not Be Able to Get Mortgage Approval

One of the biggest risks of entering into a rent-to-own contract is that you may not be able to get approved for a mortgage at the end of your lease. If this happens, you’ll lose any money that you’ve paid into the deal and will be required to move out of the property.

There are a number of reasons why you may not be able to get approved for a mortgage. If your credit score has declined or if you’ve experienced a change in your employment situation, you may not get a loan. It’s important to make sure that you will be able to get approved for a mortgage before signing a rent-to-own contract.

You May Not Be Able to Get Home Insurance

Another potential risk of rent-to-own contracts is that you may not be able to obtain home insurance on the property. This can happen if the property is in poor condition or is located in an area that is prone to natural disasters.

If you’re unable to get home insurance, you’ll be responsible for any damages that occur to the property and will likely have to move out if the repairs are too expensive. As such, it’s important to make sure that you will be able to get home insurance on the property before signing a rent-to-own contract.

>>MORE: Benefits of Buying a Home vs Renting

What to Do Before Signing the Contract

If you’re considering signing a rent-to-own contract, there are a few important things that you should do first:

Review the Contract Terms

Be sure to review the contract terms carefully before signing anything. Pay attention to the following details:

Payment or filing deadlines – Be sure you understand what is due and when it is due.
Purchase price – Make sure you understand how the purchase price is determined.
Contingencies – What must happen before the contract is binding?
Default provisions – What happens if you default on the contract?
Penalties – Are there any penalties for breach of contract?
Pets – Are pets allowed?
Insurance – Who is responsible for obtaining insurance?
Maintenance – Who is responsible for maintaining the property? And, what exactly does maintaining the property mean?
How payments are applied to the principal – Make sure you understand how your payments are applied to the purchase price of the property.

Get the Property Inspected

Before you sign a rent-to-own contract, it’s important to have the property inspected by a professional. This will help you to identify any potential problems that could cause issues down the road.

For example, the inspector may find that the property needs significant repairs or that it is located in an area that is prone to natural disasters. If this is the case, you may want to reconsider signing the contract.

Get Legal Advice

It’s also a good idea to get legal advice from an experienced real estate agent or attorney before signing a rent-to-own contract. They can help you understand the contract terms and can advise you of any potential risks.

They can also help you negotiate favorable terms, such as a lower down payment or a longer lease period. In some cases, they may even be able to help you get out of the contract entirely if it’s not in your best interest.

Get an Appraisal

While a home inspection can tell you about the condition of the property, an appraisal will tell you about the value. This is important because you don’t want to end up paying more for the property than it’s worth.

An experienced real estate agent can help you to get an appraisal on the property before you sign a rent-to-own contract.

>>MORE: What is a Land Contract?

How an Experienced Real Estate Agent Can Help You Navigate the Rent-to-Own Process

If you’re interested in entering into a rent-to-own contract, it’s important to have an experienced real estate agent by your side. They can help you negotiate the terms of the contract and can make sure that you are getting a fair deal. They can also help you navigate the complex legal process and can answer any questions that you may have along the way.

When you’re ready to start looking for a property, let FastExpert help you find the best rent-to-own agent in your area. We will match you with a list of top agents who have experience with rent-to-own contracts and who will work hard to get you the best deal possible. Simply enter your zip code to get started!

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How Does Rent-to-Own Work? A Non-Traditional Path to Home Buying

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