I recently published an article by Nicholas Brown who works for JustRentToOwn.com and it got me thinking, why do buyers enter into rent to own arrangements, and are they a good idea?
Before we delve into the question it would probably help to ensure you know what I'm talking about so I'll briefly explain what Renting to Own actually is...
Rent to Own - How it Works
As a home buyer who doesn't have the ability to put down a full deposit or access a mortgage right now, you can enter into a contract to rent the home you want to buy for a specified amount of time, usually 1 to 5 years, at the end of which you will have the option to buy the house.
Although regulations vary from state to state, here are some of the typical elements of a rent to own contract:
- You begin by putting down a deposit typically between 2.5% to 7% of the agreed purchase price (this is called 'option money') which is held in escrow and will become your part of your deposit if you exercise your option to buy the house at the end of the lease, otherwise it is typically non-refundable.
- You pay regular monthly rent plus an additional amount which goes toward your deposit/purchase if you take the option to buy at the end of the lease, again this is typically non-refundable if you don't exercise your option to buy.
- Upon moving in you become responsible for all property maintenance as any home owner would be.
- At the end of the lease you can choose to take out a mortgage and buy the property at the previously agreed price, and your option money and additional monthly payments go toward your deposit, or you can walk away but in doing so forfeit all the payments you've made including your initial option money deposit.
When you enter into a rent to buy contract you can negotiate with the seller to vary any of these basic terms, and it is vital to use an experienced real estate attorney to either help you negotiate terms, or at least check the contract before you sign.
Expert Advice on Rent to Own
In order to get an expert opinion on rent to own situations I reached out to Bill Gassett, a top Southborough Massachusetts Real Estate Agent, to get his advice on the subject. I asked Bill a series of questions to get his input. Here is what Mr Gassett had to say:
Bill in your opinion what type of buyers benefit most from rent to own?
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Jason over the years I have run into a few people who can benefit from a rent to own situation. The typical scenario is someone who would love to own but either does not have enough of a down payment saved to qualify for a mortgage or has credit issues that prevents them from procuring a loan.
What are the downsides?
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The downsides of a rent to own is if you lock yourself into a contract that you must move forward at a specific point in time and the market takes a turn for the worst. Can you imagine agreeing to purchase a home for $300,000 only to find out a year later it is now only worth $275,000. This would not be a great situation to be in!
Do you think it is better to save for a deposit and improve your credit rating to purchase a home the regular way, or is renting to a buy a good way to improve your credit rating?
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If you really love the home that you are renting then renting to own can be a real win-win. Typically in a rent to own some portion of the rent will be put towards the deposit on the home. This allows a tenant to save some money that will be put toward the purchase price. A buyer can still be working on increasing their credit score at the same time. If on the other hand there are doubts that you will want this home in the future it may be better to opt for a straight rental.
Do you have any other advice for someone thinking about renting to buy?
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When considering renting to buy you must be sure that your life circumstances are not going to change that will cause you to regret your decision. For example are you buying a home that is good for a bachelor but not necessarily good for a family? Understand where you are headed in life before you make commitments that could cause financial heartache down the road.
Conclusion - Should You Rent to Own?
I agree with Bill that if you're confident this is the house you want to buy at the end of your lease then it can be a good way to enter the property market. Your option money and additional monthly payments during the lease will ensure you have saved enough for your down payment and so long as you will be able to get a mortgage, you'll become the owner of your own home!
If you're interested in learning more about this topic then I recommend you read the Rent to Own Guide.
You might also like to read:
• Five Ways To Own A Home For $50,000 Or Less
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