Debunking the Rent-To-Own Process with Rent-to-Own Tips and Strategies

Rent-to-own homes are an increasingly popular option for those who want to purchase a home without the traditional path of getting a mortgage. It can be a great way to get into home ownership before you have saved enough money for a down payment. You can also start gaining equity in your home before you own it.

However, there are certain things you need to know before diving into a rent-to-own agreement. In this article, we will discuss the meaning of rent-to-own and some tips and strategies you should consider before signing a rent-to-own agreement. We will also provide some information on what to watch out for and how to ensure you get the best deal.

What is rent to own?

Rent to own, also known as a lease option, is an agreement between a tenant and a landlord in which the tenant pays a rent above market value to purchase the property. It is a popular option for people who want to buy a home but need more money for a down payment. Rent-to-own agreements can be beneficial for both the tenant and landlord. Typically the rent-to-own process has two steps.

The tenant will first sign a rental lease agreement, akin to a formal lease agreement, that defines a monthly payment and rules and considerations for the house.
Then, the tenant will agree to a lease-purchase agreement or a lease-option agreement, which serves as the purchase option and give the tenant the right to purchase the home. This will list the home’s sale price, how that price is determined, and how rent payments will apply toward the purchase—more on these below.

Lease-purchase vs. lease-option

There are two principal contracts you’ll run into when considering a rent-to-own option. While they both allow you to make small payments to purchase the home over time, there are some differences between the lease-purchase agreement and the lease-option agreement. Let’s discuss them.

A lease-purchase agreement allows the renter to pay a portion of the rent each month towards the home’s down payment. The price of the house under a lease-purchase agreement is determined ahead of time. This option allows the renter not to purchase the home at the end of the lease contract.

A lease-option agreement requires the renter to pay an upfront payment, an option fee, to secure this type of rent-to-own agreement, typically 1 to 7% of the home’s sale price. This fee is generally deducted from the home’s price at the end of the lease. This lease also allows renters to pay credits and additional payments towards the down payment. When the lease expires, renters and sellers can negotiate a final purchase price.

Rent-to-own benefits

A rent-to-own option can be incredibly beneficial for both parties. For the tenant, it allows them to test out living in the house before committing to buying it. For the landlord, it provides them with an additional source of income.

For tenants, a rent-to-own home is a great way to get into the property market without putting yourself under financial pressure. This is because it allows you to pay as you go, and you don't have to make a large lump sum payment at the beginning. Best of all, you can rent-to-own your home with a small deposit and pay a monthly rent, which will be adjusted according to the length of your agreement.

Rent-to-own disadvantages

If you don’t have credit history, it's hard to get a traditional mortgage. Rent-to-own isn't a perfect solution, but it provides a way to get into your own home without accumulating a bunch of debt you might not be able to pay off. It's also a great way to build your credit. When you rent-to-own, you're making a small down payment, which you can use to build credit while you build equity.

What to consider as a rent-to-own tenant?

Rent-to-own is an innovative approach to home ownership that enables tenants to rent a home for some time, with the option of buying it at the end of the lease. For those who need more time to secure a mortgage or are not quite ready to commit to a long-term mortgage, rent-to-own can be a great solution.

Before entering into a rent-to-own agreement, some considerations must be considered. Below, we’ve outlined the key factors to consider when evaluating a rent-to-own agreement. If you're considering a rent-to-own agreement, ensure you know what you're getting into.

Tips for a successful rent-to-own agreement

For Tenants

Care for the property as if it is your own. Who knows? It might be!
Monitor your credit. Rent-to-own is an excellent option for those with less than outstanding credit.
Determine whether the lease-purchase or lease-option works best for you.
Research the seller and any public information on the home. Before agreeing to purchase the home, you’ll want to know if the house has any outstanding liens or charges.
Do a home inspection just as you would for a home purchase. The timing of this may depend on your agreement.

For landlords

Collect the option fee. This is a non-refundable payment paid by the tenant to put a purchase option in place. The fee can range anywhere from 1 to 7% of the purchase price and is taken off the purchase price at the time of sale.
Clearly define rental conditions in the agreement.

Conclusion

Rent-to-own homes have become increasingly popular as they offer potential homebuyers a chance to build up their credit and save for a down payment. If you're considering a rent-to-own agreement, research the terms of your contract and understand the deal. Talk to a financial advisor or real estate attorney if needed. Finally, review your credit score and work on improving it so that you can qualify for a mortgage when the rental period ends. With these tips, you can take advantage of rent-to-own homes and eventually own your dream house at an affordable price. Rent2OwnShop.com will connect individuals with rent to own home search listings in their area.