Would a Rent-to-Own agreement be right for you?
Posted by: George Fry
Date: June 12, 2020
Posted by: George Fry
Date: June 12, 2020
Most people that want to purchase a home will need to get a mortgage to finance the purchase. To qualify for a mortgage, you must have a good credit score and enough cash for the down payment. If you have challenges in either of these areas then you may want to consider a Rent to Own approach to home ownership.
Rent-to-own is also known as a Lease Option or a Lease Purchase. These are legal contracts, where you, the tenant/potential buyer, under the written terms of the contract, have the opportunity to purchase the property you are leasing at a later date.
When talking with clients I have found that many people think that the term rent-to-own means that all of the monthly rent would be applied to the eventual purchase of the home. While this would be a fantastic opportunity for a buyer, it is almost never a great deal for the seller/investor. As with any type of purchase transaction, a rent-to-own agreement will only work if both the seller and the buyer will benefit from the transaction.
Lease Purchase: In this lease option an investor will buy the home you select, and then lease it back to you for up to 5 years. With this option the buyer is not obligated to purchase the home and there is no penalty for not completing the purchase. There are no upfront costs for the potential buyer beyond the standard first month rent and security deposit. During the 5-year period the buyer has the exclusive right to purchase the home at any time, at a preset price. The lease is in one-year increments and the monthly payment will increase yearly at a preset amount. There are no surprises, and the buyer has the time they need to repair credit or save money for the down payment.
In this situation the potential buyer has a lot of flexibility. You can end the agreement at the end of any one-year lease period. However, the monthly lease is usually above the market rate, and the tenant does not have the right to make any changes to the property until they actually purchase it.
Lease Option: In this lease option, the potential buyer pays the property owner a one-time (usually non-refundable) lease option fee called option money. This fee can range in amount but is often between 2.5% and 7% of the property’s purchase price. The option money is credited toward the purchase price when the transaction closes. The contract specifies a set time period in which the buyer must exercise the option to purchase the property, commonly 1-5 years.
The Pre-Possession agreement: While this is similar to a lease purchase, it is not a lease and is not covered by the Landlord Tenant Act.
When entering into a pre-possession agreement, the buyer will actually sign a purchase contract for the home, but the date for closing is set at an agreed upon date in the future. Typically the date would be within 1-5 years.
The buyer pays the seller a nonrefundable pre-possession fee that is credited toward the purchase price at closing. This fee is negotiable, but is commonly 5%. The buyer also pays a monthly pre-possession fee (equivalent to monthly rent) that is not applied to the purchase price. The buyer is also responsible for maintaining the property, at minimum to its current condition, including repairs.
There are a variety of ways that a rent-to-own agreement can be structured, the details of which are specified during the negotiation process. In fact, there are far too many variables to adequately explain all of them in this brief overview.
Therefore, to protect your interests, it is always advisable to obtain the services of a real estate professional, or seek legal advice from a real estate attorney, before entering into any legally binding contract.
Written by George Fry – George is a real estate agent at CENTURY 21 Northwest Realty.
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