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    Home » Rent-To-Own Properties; How They Work and What You Should Avoid at All Costs
    Home Management

    Rent-To-Own Properties; How They Work and What You Should Avoid at All Costs

    Amos ZBy Amos ZApril 24, 2023No Comments4 Mins Read
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    It’s at the top of most Americans’ bucket lists to eventually become a homeowner, and as important as that can be, most fail to achieve this in their lifetime, and the current state of the housing market isn’t exactly helping.

    For most, it’s their credit rating that’s holding them back from getting a mortgage, and the banks have tightened up ever since lenders almost crashed the economy back in 2008.

    Thankfully, there are dozens of different affordable housing options for low-income American out there, and the rent-to-own properties are a great choice for anyone looking to settle down in their forever home one day.

    The term is fairly self-explanatory, and you’ll find that it’s not much different from a standard lease agreement, save for the fact that you’ll actually become the owner once it expires.

    That being said, you’ll have to keep some things in mind when renting/purchasing these properties, and we’ll try to guide you through it to the best of our ability.

    How does it work?

    Before you dive in, you’ll want to know how a rent-to-own agreement works, as it can be deceptively difficult to understand if you’re new to the whole thing.

    Unlike a normal rental agreement, rent-to-own homes come with an additional clause that stipulates you have to purchase the home after a certain period of time.

    Some of these agreements don’t force you into buying a home, but rather, just give you the ability to do so, if you opt out of purchasing once the agreement ends, you’ll be forced to vacate the property.

    On top of this, you’ll be in charge of covering all the maintenance costs, which isn’t the case for a standard rental where the landlord is usually the one tasked with this.

    This means that a lot more responsibility falls on you should something break or be in need of repairs, so continue with caution.

    You’ll also have to follow a set of rules the landlord defines, and even though you’re going to become the owner of the property at some point, you’re gonna have to abide by the owner’s rules until then.

    Option fee

    Once you enter the agreement, you’ll be presented with the mandatory option fee, which is essentially what allows you to buy the property after a set amount of time has passed.

    This fee is non-refundable and will amount to anywhere between 2% and 7.5% of the property’s purchase price.

    If you do choose to proceed with the purchase upon expiration of the agreement, this amount will be put towards the purchase price of the home or the closing costs, whereas pulling out of the purchase will lose you the money you’ve invested.

    This is a form of incentive to actually buy the property, as you’ll be losing a fair amount of money by opting out.

    Rent payments

    You may also find that rent is significantly pricier for rent-to-own homes, and that’s because a portion of the amount you’ll be paying can be credited toward the purchase price.

    This allows you to pay off a portion of the home long before you’re in the position to actually buy it, making the expense much less of a burden on your finances than it would normally be.

    The amount that’ll be credited to the purchase price is highly negotiable, and you’ll determine it with your landlord upon signing the rental agreement.

    It’s important to note that this amount, much like the option fee, is also non-refundable, giving you even more incentive to go through with the purchase rather than losing yourself tens of thousands of dollars of your hard-earned money.

    Things to avoid

    While these agreements can be highly beneficial to some, they can also completely ruin your finances if you’re entering one unprepared or if you overestimated your purchasing power several years into the future.

    A lease option and a lease purchase are two very different things, and you should clarify whether the agreement is for one or the other with the landlord before signing, as you’ll be risking having legal action taken against you if you pull out of purchasing after signing a lease purchase.

    You should also make sure that the landlord is the legal owner of the property and that their mortgage payments have been paid off, as you could lose out on all the money you’ve contributed towards the home if they fall behind on their payments or default on their loan.

    Finally, you should hire a professional home inspector to assess the property’s value, as any repairs on the property will become your responsibility from the moment you sign the lease, and you won’t want to be dealing with that right off the bat, especially if the home’s current condition was caused by the previous renters.

     

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