When buying a home the traditional way, buyers typically have to have a down payment saved up ahead of time, qualify for a mortgage to pay the balance of the loan, and have all their ducks in a row before moving into their new home. Rent-to-own is an alternative for people who want to move now, but are not yet in a position either credit-wise or cash-wise to do so. This is a popular option when the real estate market is saturated with homes for sale, as it can be a win/win for both the home buyer and the seller. It’s also a good option for first time home buyers who may not be experienced with the ins and outs of home purchasing yet and need a way to get their feet wet.
Here’s how it all works, but keep in mind that each home buying experience is slightly different. The terms of a rent-to-own agreement are usually worked out between the seller and buyer and may vary. In general, a selling price and length of lease is determined right upfront. The length of the lease is usually anywhere from one year to three years to allow the buyer time to build up his credit and save a down payment. Usually a small deposit is required, but less than a traditional down payment. For instance, a deposit of 2.5 or 5 percent of the agreed upon purchase price will be due at the beginning of the real estate agreement.
Monthly payment is agreed upon, and may be higher than current market value in the area for a comparable property. This is because a portion of the money is often set aside by the seller to be used towards the down payment at the time of purchase. For example, if rent is $1,000 a month, it may be agreed that $200 per month of that will be used towards the ultimate purchase. If the agreement lasts for three years, that means at the time of purchase, the home buyer will already have $7,200 towards buying the home.
In some cases, there is a lease agreement for home buying, meaning the home buyer is obligated to buy at the end of the agreed-upon term of time. In others, there is an option to buy then. It’s very important that both parties in this situation are clear on what they are signing up for, especially a first time home buyer who may not know what to look for in a home purchase agreement.
Often, the prospective buyer has more obligations around the home than a tenant traditionally would. The prospective buyer may agree to handle all yard work and or handle any repairs that come up, for example.
Rent-to-own is an alternative for people who want to move now, but are not yet in a position either credit-wise or cash-wise to do so. If you’re in a saturated real estate market or working with a first time home buyer, rent-to-own may be the best option for you to consider.