Rent to own homes are popular financing opportunities for individuals who want to purchase houses but cannot currently afford to make these large investments. Generally, these residents are unable to purchase houses outright because they do not have enough money saved to pay the down payment on a house. Additionally, buyers may be unable to purchase homes because their low credit scores prohibit them from obtaining mortgage loans. Regardless of the circumstances, these rent-to-own opportunities are available to claimants who, for one reason or another, cannot purchase homes at the present time.
Instead of simply searching for houses for rent, prospective buyers may be able to create agreements with current homeowners who are looking to sell their properties. This enhanced version of the rental agreement can be advantageous to both parties under the right circumstances. However, both the seller and the buyer need to understand the benefits and disadvantages that can come with these agreements before they decide to pursue them.
How do rent to own homes and contracts work?
Rent to own homes can be practical options for buyers who are sure that they have found the perfect houses for themselves and their families. The residential lease agreement is particularly useful when a prospective buyer does not have the financial means to buy his or her dream home when its current owners put it up for sale.
With these rent to own arrangements, current homeowners usually agree to forego immediately selling their homes. Instead, owners may choose to set up agreements with renters. In these arrangements, renters are permitted to live in these houses under the legal presumption that they have intentions to buy these properties at the end of their agreements. While the candidates live in these homes, they are responsible for paying rental payments. Additionally, these renters are also responsible for making additional payments, which eventually make up their down payment for the home.
When purchasers sign this type of residential lease agreement, they agree to this arrangement for a set period of time. Throughout the months when the renters are leasing these properties, they must consistently contribute to their down payment funds. In many cases, the renters must pay the sellers a certain amount of money toward their down payments by the end of their leases or else the contracts may be nullified.
About the Benefits of Rent to Own Homes for Homeowners
A rent to own rental agreement can be as advantageous to homeowners as it is for prospective buyers. Often, sellers who take advantage of this option are able to earn more for their properties than they would have if they immediately placed their homes for sale in the housing market. This becomes possible for the following reasons:
- Higher rent payments: Due to the convenience that comes with these rent to own homes, homeowners can sometimes charge higher rent prices to tenants.
- Receiving asking price: For similar reasons relating to convenience and flexibility, homeowners who rent their properties to prospective buyers are usually more likely to receive their asking prices. This is due to the fact that the renters are committed to the property and may be willing to pay more for the special renting circumstances they have.
- Nonrefundable option fee: Usually, homeowners require tenants to pay nonrefundable option fees when they sign their rental lease agreement. On principle, this fee is what renters must pay for the privilege of renting their home and building equity toward the purchase. Additionally, the fee provides homeowners with financial security if the renters decide at the end of the lease that they do not want to buy the house.
Furthermore, sellers never know when a housing market crash can occur, which can eliminate the possibility that they will be able to sell their home for a reasonable price. While homeowners need to wait for this return in payment, the wait can provide them with more profit over time.
About the Benefits of Rent to Own Homes for Renters
There are various reasons that could encourage tenants to rent to own a home. Usually, families opt for this financing opportunity because they:
- Have less than perfect credit scores, which prohibit them from securing bank-issued mortgage loans, which are usually needed to purchase homes.
- Do not have the funds on-hand to afford to pay the down payment on a house before they could buy it.
- Want to build equity toward their home and do not want to invest funds into a rental property without a long-term payout.
Individuals who fall into any of these categories may decide to pursue houses for rent with ownership clauses when they are ready to make long-term commitments. In many instances, these options are the only ones that are available to renters who want to purchase their homes but cannot wait until they build their savings budgets or improve their scores. Furthermore, the flexibility that this option provides renters can be invaluable. In many cases, tenants who live in homes for rent that they can purchase later on may be able to make structural and cosmetic changes to the house. This is due to the fact that, in a perfect scenario, the renters will eventually own the homes they are living in.
Is a rent to own home the right option for me?
Instead of investing their funds in rental properties for short-term lease periods, some individuals may benefit from entering lease agreements that end with them purchasing their rental properties. However, households must be sure that they thoroughly review their finances and assess their long-term goals before they enter these legal agreements. First, tenants who enter this rental agreement must be sure that they earn enough income on a monthly basis to afford their rental payments, as well as the monthly down payment fee.
Before residents rent these homes, they must also have reasonable guarantees that their jobs will be available to them throughout the lengths of their leases. In most cases, rent-to-own tenants are required to pay nonrefundable option fees to their landlords when they sign their leases. These payments serve as insurance that the renters are seriously considering purchasing these homes.
Whether the tenants complete their rental agreement or not, they will not be reimbursed for their option fees. However, renters who do not fulfill their lease terms will be out of their option fee money and a home as well. Furthermore, lessees who are unable to afford their rent and down payment installments each month may be evicted from their homes. In these instances, renters are also likely to lose their down payment investment.