The Basics of Rent to Own Homes
A rent-to-own home purchase, also known as a lease-to-own home purchase, is an agreement that the renter will purchase the home with a specified period of time, usually no more than three years. The renter pays an option fee of 1 to 5 percent of the selling price, and this fee is credited against the price when the renter exercises his option to buy the house.
The renter also pays an agreed upon rental fee plus a premium. If the renter decides to buy the property, the premium is credited against the price. If the renter decides not to buy at the end of the agreed upon period, he loses both the rent premium and the option feed.
The rent-to-own option appeals to people who want to buy a house but need to work on getting their credit in better condition before they can qualify for a loan. For this reason, many people who choose this option look for the longest option period possible.
Of course, if they end up being unable to buy the house, or if they chose to not exercise their option, they stand to lose more money the longer the option period is. Sellers, of course, prefer shorter option periods although they know that if the option period is too short, the house is likely to not sell.
For buyers, the advantage of a rent-to-own agreement is that they can move into a home they plan to buy now and live there while they work to get their finances in shape so they can purchase the house.
Some rent-to-own agreements also allow the buyer to assign the option to someone else if they decide not to purchase the house. In the buyer’s eye, the option fee and the rent premium are equity in the home, and they can sell this "equity" to another buyer if the seller agrees.
The buyer also gets a chance to "test-drive" the house and discover if there are any hidden problems they might want to avoid. The equity fee and rent premium are much cheaper than buying a house outright only to find that it needs major repairs.
On the other hand, sellers are making income on the property, both through the rent and the rent premium, plus the option fee, so even if the deal falls through, they've made some money on the non-refundable option fee and rent premium.
People thinking about doing rent-to-own purchases should be aware that unlike mortgage payments, making rent payments on time does not help improve a credit score.
If you are using the option period to improve your credit so you can get a loan, you should focus on paying off credit cards and loans as those are the things your credit score is based on. Making your credit card and loan payments on time, and maintaining a low balance on any credit cards, will determine whether or not you can qualify for a home loan.
If you do decide to buy a house through a rent-to-own agreement, make sure you read the contract carefully and have it reviewed by an attorney. Some contracts are written so that it's easy for the seller to evict the tenants and turn around a do another deal with another person who hopes to buy the house. This allows the seller to make extra money on a house he has no real intention of selling.
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