If you’re reading this I’m sure you’ve pondered about or have seen the “rent-to-own” signs around town. With the rent-to-own option now available to more tenants to buy a house, I have been asked how they work. Before we answer that question let’s review the basics, the ideal rent-to-own candidate, and the math behind it.

The Ideal Rent-to-Own Candidate

A rent-to-own agreement can be a convenient option if your goal is to be a homeowner but aren’t quite ready, financially speaking. These agreements give you the chance to get your finances in order, improve your credit score, and save money for a down payment while, most importantly, “locking in” the house you’d like to own. Typically a percentage of the rent goes toward the down payment (10 – 20% of rent).

You, the tenant, signs a rental agreement or lease that has an option to buy the house later – usually within three years. Your monthly payments will include rent payments and additional payments that will go towards a down payment for purchasing the home. The lease contract will state your rental payment, how much of the rental payments accrue toward a down payment, and how much the purchase price of the home will be. 

Rent-to-Own is a good option if:

  • You have less than stellar credit and need to build up good credit history while renting.
  • Need to save money for a down payment.
  • You want to lock-in the home before it’s put on the market and sold.

Important note: 

Signing these agreements are just as serious as traditional real estate purchase agreements. 

Before you sign a rent-to-own lease from your landlord/seller, you should get pre-approved for a mortgage at the purchase price stated in the contract or lease to ensure you can afford the home. If you can’t, it may not be the right option, because the contract could increase the rental price to account for the contribution of rent payment that’s accruing toward your down payment.

Let’s do the math.

Let’s say you signed a rent-to-own lease that had your rental payment at $1,350, with $250 per month accruing toward a down payment, and a purchase price of $200,000. This would mean you would accrue $9,000 over three years to go toward a down payment, which would be 4.5 percent of the purchase price.

Assuming you didn’t save any more money than that during that time, you could buy the home using a 3.5-percent FHA loan or if you had saved money, an extra $1,000 towards downpayment would qualify for a 5 percent conventional mortgage. As long as your pre-approval in the beginning of the process determined you could afford this, it could be a great deal.

If you do want or need to move, rent-to-own will limit you to that single property purchase option, and might not be worth it.

Before you sign the Contract

Even though you’ll rent before you buy, it’s a good idea to exercise the same due diligence as if you were buying the home outright. Be sure to:

  • Choose the right terms. Enter a lease-option agreement rather than a lease-purchase agreement.
  • Get help. Hire a qualified real estate attorney or real estate agent to explain the contract and help you understand your rights and obligations.
  • Research the contract. Make sure you understand:
  • The deadlines (what is due when)
  • How much of the payments applies towards rent and downpayment
  • How the purchase price is determined
  • How to exercise your option to buy (for example, the seller may require you to provide advanced notice in writing of your intent to buy)
  • If pets are allowed
  • Who is responsible for maintenance, HOA dues, property taxes, etc

If you’re interested please contact a real estate attorney or Mike Balicki w OMNI Homes International. We have designed a program to find homes that are not on the market and can work with you and the homeowner on a rent-to-own agreement.

Thank you for reading, we hope this provided value. If you have any questions at all feel free to reach out below!

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