A rent-to-own agreement is a leasing contract where the owner rents out a property, furniture, jewelry or other assets tointerested buyers, under the assumption that they will eventually purchase it. When it comes to real estate, it is a greatoption for renters who want to own a home eventually but may not currently have the finances to do so. Rent-to-own buyersgenerally pay a higher rent premium, which will serve as a down payment for the purchase down the line.
Though the purpose of these types of leasing agreements is buying a property after the rental period is over, buyers canchoose to back out of the agreement, but only if the contract permits. As such, sellers can set measures to ensure buyersare serious about purchasing the property after the completion of the rental period. Before taking the leap as a rent-to-ownseller or buyer, there are a few factors to consider.
Currently, there is a shortage of residences for sale nationwide. Due to the low supply of homes, sale prices have risen.While the market is expected to change over time, the shortage has caused a decline in home affordability, meaning thatfewer people are able to afford the current prices of homes. Those who are unable to buy a home due to poor credit or financialrestrictions may find a great alternative in a rent-to-own property. For sellers struggling to sell their property, thisis an opportunity to receive residual income until the home is sold.
A rent-to-own contract can include one agreement for the rental period typically between 12 to 36 months and anotherfor the home purchase. Rent-to-own tenants pay a premium on rent, usually an amount higher than the market rate, which isthen put toward the home’s purchase at the end of the lease. The two types of rent-to-own agreements are:
- Option-to-buy agreement: This document states that tenants have the option of buying the home after the rentalperiod or forfeit the rent premiums they have paid.
- Obligation-to-buy agreement: With this, tenants can face legal repercussions if they back out of the agreement,even if it is for financial reasons.
A contract generally states that the buyers will rent the property for a set amount of time and will have the option to purchaseit on or after a specific date. Contracts should also include:
- The monthly rental cost, due date for payments and penalties for late payments.
- The rights of both landlord and renter.
- Details on who holds the responsibility for repairs and maintenance during the rental period.
- Acceptable circumstances for eviction, if applicable.
- Consequences for breach of contract
The agreed-upon purchase price should also be listed in the contract, which can be set higher than the market value for theproperty.
An option fee is a nonrefundable deposit sellers require buyers to present in case of a termination of the contract. It servesas a protection in the event that the buyer does not follow through with the agreement. Once the buyer is ready to purchasethe home, the fee typically goes toward the down payment or purchase price. However, if the purchaser withdraws from theagreement, the fee is forfeited.
Insurance And Repairs
When it comes to insuring a rent-to-own property, it can be difficult to determine which party is responsible for it duringthe rental period. The seller is responsible for paying the homeowner’s insurance and property taxes until he or she nolonger own the home. However, renters should also obtain renter’s insurance to protect themselves and their possessions.As for repairs, landlords may require renters to cover all or most maintenance and improvements, as the house is meant tobe theirs soon enough. This is why it is essential that renters have the property inspected fully before entering into anagreement, especially if they cannot afford repairs. Here are a few things to look out for when inspecting a home:
- Leaking Roof
- Rotting wood
- Structural cracks
- Standing water
- Lead paint
- Insect infestation
It is important to note that landlords, not renters, are responsible for fixing code violations on the property. If a contractstates otherwise, it is illegal or should be reported. Furthermore, pay special attention to contract clauses on reasonsfor eviction, as this might greatly affect the buyer and his or her investment.
Benefits And Risks
From a seller’s standpoint, there are various advantages to listing a property as rent-to-own. The first is the steady streamof income during the rental period. Sellers planning on moving into another home could put that income toward the paymentof their next property. In addition, a rent-to-own agreement can offer a seller the peace of mind of knowing the buyer isserious about purchasing the home. A property may not do as well as expected on the market. Home sellers can rest easy knowingthey have a potential buyer already living and investing in the home.
Even so, renting a home also comes with its drawbacks. As with any rental property, you are entrusting someone, most likelya stranger, to take care of the property. If a contract states that the seller will remain responsible for repairs and maintenanceduring the rental period, he or she might have to put additional funds into fixing the property if a problem arises. Moreover,sellers who choose an option-to-buy contract have no guarantee the renter will buy the property after the rental period,and might have to put the home back on the market.
As for buyers, rent-for-own agreements are great if they are having difficulty qualifying for a home loan due to bad creditor other financial limitations. Rent-to-own agreements give buyers the opportunity to build savings and improve their creditwhile settling into their new home. In addition, buyers may realize during the rental period that the property no longerworks for them. If the contractual agreement allows it, renters can back out of the purchase with confidence that it isthe right decision. Buyers should stay updated on the home’s market value as it could affect their decision to purchase.
On the other hand, buyers might lose out on their investment if they do decide to back out from the agreement. Furthermore,there is a chance they could get evicted from the property and lose out on the investment if the terms of the lease areviolated. It is critical to understand all the terms of a rent-to-own contract before signing on the dotted line.