Usually, when people rent a place to live, they lose all that money when they move out. They don’t get the house or their money back. Someone might wonder how amazing it would be to pay rent every month and eventually own the house. Some other people might need to live in a neighborhood for a while before they can completely move. This can give them a clear idea about the condition of the house and its surroundings before completing the home-buying process. Regardless, people may be able to benefit from a rent-to-own housing option. This option makes it possible to rent a place with the ability to buy it later.
How is Rent-to-Own Option Different From Regular Rent Agreements
What people dislike about renting is the fact that every penny they paid for rent feels like a waste of money by the end of their lease. That is because when you sign a regular lease, you will typically be expected to move out after a specific period of time. This is where some can appreciate rent-to-own agreements. This type of arrangement gives you the opportunity to eventually purchase the property.
While regular rent agreements give you only the option of moving out when your lease is over, with rent-to-own contracts you can have one of two options:
- The option to buy at the end of the lease
- The obligation of buying at the end of the lease
The contract usually sets a specific period of time after which you can purchase the property in compliance with the agreement’s terms and conditions. Your contract will also specify how you will pay for the house. However, most contracts state that a portion of the rent will cover a part of the property’s price.
Another difference between a regular rent lease and a rent-to-own contract is the type and amount of fees. In fact, there will typically be some fees waiting for you to pay if you choose this housing option. First of all, there is an option fee which typically ranges from 1% to 5% of the property’s sale price. However, option fees are negotiable but you usually can’t get a refund on them. It’s called an option fee because it gives you the option of buying the property you’re renting.
Who Can Benefit From This Type of Housing Option?
Anyone can take advantage of this option. There are no specific requirements. However, it can be especially useful for people who struggle with the typical home-buying process or need more time to fix their credit score. Moreover, this is an excellent opportunity for those who are not yet financially ready for a down payment. So, generally speaking, this option gives potential homebuyers more time to improve their financial situation before purchasing a home.
How to Prepare for a Rent-to-Own Agreement
Now that you understand how rent-to-own agreements work, you need to learn what to do before signing a contract, just to make sure you’re on the safe side. So, it’s recommended that you:
- Conduct your own research
- Consult a property lawyer
- Check out the seller’s background and the property’s condition
- Get answers to every question you have
- Make sure you know what you’re agreeing to
Getting a Rent-to-Own Property
If you have already decided to take advantage of this option, you might be wondering what you should do next or where to start. Actually, entering a rent-to-own agreement will be a simple process if you have a clear idea of the following:
- What to Expect During the Purchasing Process
- Negotiating an Acceptable Property Purchase Price
- Making Payments Toward the Principal Balance Using Rent
- Who Will Be Responsible For Maintenance
What to Expect During the Purchasing Process
When your rental term is over, it’s typically time to buy the property, if that’s what the contract says. However, the homebuying process will be different depending on the terms of the lease. This means that you have to understand what your particular agreement states about how the purchasing process will go. This will help you avoid issues.
What Happens If You Can’t Meet the Requirement of Purchasing the Property?
Some problems can arise if the lease agreement specifies that you must buy the property at the end of the lease period, but you failed to secure funds. In fact, you may face some penalties if you break your lease agreement by not buying the house in this case. For this reason, rent-to-own agreements, in which you have the choice but not the obligation to purchase, are better.
Negotiating a Mutually Acceptable Property Purchase Price
In general, you should expect the purchase price to be a little higher than the typical market price. It’s usually possible to agree on a price with the owner when you sign the lease. There is also the option of determining the property’s price after the lease period ends. This depends on your specific agreement. Therefore, to make a wise decision about a rent-to-own agreement, you should fully understand when and how the property’s purchase price will be determined.
Making Payments Toward the Principal Balance Using Rent
The rent-to-own option doesn’t only give you more time to save money; it also makes it easier to pay the property’s cost. It may be able to help you pay a portion of the property’s price through your monthly rent payments. Additionally, the option fee (fully or partially) may be applied toward the purchase price.
To put this into perspective, suppose your rent rate is $2,000 per month for 4 years. If your lease says that 25% of your rent should go towards the purchase price, you would have paid $24,000 of the house’s price by the end of your lease.
Who Will Be Responsible For Maintenance
When it comes to who should handle the property’s maintenance, you should be aware that it can be different from regular rent settings. This is because, in the case of rent-to-own, the ultimate goal is to become the owner of the rental when the lease expires. That is why you shouldn’t always expect your landlord to take care of any necessary repairs to the property unless your lease states otherwise. Instead, this responsibility may fall on you. For this reason, it’s important to understand what the agreement says about who handles maintenance and how.
In Conclusion
When you’re trying to buy a house, you might run into some problems, especially ones that have to do with money. At the same time, it feels bad to lose money every month on rent. However, the possibility of buying a house while keeping the benefits of renting exists. The rent-to-own option might be the solution you’re looking for. This option gives you more time to prepare financially to buy the property. While you live in the property as a tenant, you can find out more about it. Moreover, you will get the opportunity to save for mortgages and other relevant housing costs. Overall, rent-to-own could be a good option for you, so you should consider it when comparing your options.