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Rent to own homes or also known as lease-to-own homes is a type of contract between the tenant or buyer and the owner of a property.

In rent-to-own, the seller is given a certain amount of time to rent the property before s/he will decide to purchase it.

For sellers, this is a beneficial way to put the property on the market especially if they have a hard time selling it. This may also be helpful for people looking for a decent house who have a limited budget.

However, going for rent-to-own agreements may also pose risks to both buyers and sellers, that’s why it is crucial to assess your budget and plans before signing the contract.

In this way, you can avoid jeopardizing your money and plans in purchasing a property. To know more about rent-to-own homes, read this article further.

How Rent to Own Homes Work?

The rent-to-own home contract is done when both the buyer and the seller establish an agreement in terms of rent pricing, the final purchase pricing, and the duration that the buyer rents the property.

Usually, a portion of monthly rental fees goes to the final payment of the house.

Further, a rent-to-own contract may also either oblige the tenant to purchase the property at the end of the bargain or give the tenant the option to purchase the property or turn it down, this will depend on the agreement.

In a rent-to-own contract, you should also expect to pay an initial amount of money that will serve as a down payment of the property. Once you pay for it, it is no longer refundable even if you decide not to purchase the property at the end of the contract.

Types of Contracts in Rent to Own Homes

There are primarily two types of rent-to-own contracts, mainly:

  1. Lease-option: Lease-option includes paying an option fee of about 2-7 percent of the total pricing of the property. This will serve as your down payment for the property along with the accumulated portions of your monthly rental fees. In this type of contract, you are not obliged to purchase the property if you opt not to at the end of the contract.
  2. Lease-purchase: On the other hand, a lease-purchase agreement may not include an option fee in the contract. However, the buyer and the seller will agree to include a certain percentage from the monthly rental fees to go to the downpayment of the property. Unlike lease-option agreements, lease-purchase obliges the buyer to purchase the property at the end of the contract.

What’s Better?

Deciding between lease-option and lease-purchase agreement can be confusing and tricky. The best option may depend on the situation of the real estate market.

If it happens that prices of houses in the state are rising, it is better to choose the lease-purchase agreement so that you can settle for a price you can afford.

Whereas if the prices are decreasing, the lease-option agreement would be the best for you. If you want to make sure that you choose the best option possible, consult your real estate agent before jumping to your final decision.

Pros and Cons

Are you still confused if you will go for a rent-to-own agreement? Weighing the pros and cons of your options will help you decide better.

Below are some that you might consider:

Pros of Rent to Own Homes

  • Bad credit score: Rent-to-own homes are quite advantageous especially to those who have a bad credit status. This means that the buyer can eventually improve his/her credit score while renting the property and can get a loan to purchase the house at the end of the contract.
  • You can test and check the property well: This is one of the good things about rent-to-own because as you rent the property for a specific amount of time, you will eventually determine if there are problems with the living space. Till then, you will have ample time to decide if purchasing the property is worth it or not.
  • Price is fixed and final - This is an advantage for the buyer if the market prices are increasing as time passes, you can secure a fixed amount and need not worry about the price increase when you reach the end of the contract. However, this may be more advantageous for the seller if it goes the other way around.

Cons of Rent to Own Homes

  • It might possibly forfeit your money: If you reach the end of the contract and decide not to buy the property, you will lose the initial payment as well as the accrued portions from your rental fees since it is not refundable.
  • Risks in the pricing: Since rent-to-own contracts have fixed and final prices once the agreement is established, if it happens that the market prices are falling, the seller will no longer allow further negotiations on the pricing.
  • You have limited control of the property: While you are still in the period of renting the property, you have limited control of it. This means that even if you want to have some renovations or changes on the property if the owner does not allow it, you can not oppose it.
  • It is more expensive than you would expect - There are instances when you enter into an agreement with the seller and set a higher down payment along with higher rental fees. In this case, when you decide not to buy the property in the end, you will lose more money than you would expect, especially if the market prices fall.

Process in Rent to Own Homes

To know more about rent-to-own homes below are the expected process of the contract when you enter one:

Establish and review the agreement between you and the seller

It is important that you review the agreement first before signing. The contract should include the duration of your rental phase, the monthly rental fees, the percentage portion from the monthly payments that will go to the downpayment for the property, as well as the final and fixed price of the property at the end of the contract.

Get a home inspection and independent appraisal of the property first

It is best to get an independent appraisal before agreeing with the final pricing of the property. At the same time, it is important to get a home inspection of the property first to determine if buying it is worth it at all.

Pay the initial/option fee

After establishing the final agreement with the seller, you will then pay for an initial or option fee that serves as a downpayment and the opportunity to buy the property at the end of the contract.

Pay your monthly rental fees on time

In a rent-to-own agreement, it is crucial to pay your rental fees on time. Failure to do so might lead to a void of your agreement. Thus, you might lose the money that you have paid earlier before.

Find a mortgage

When you are near the end of the contract, it is advisable to shop for the right mortgage for you. This might help you save some dollars upon purchasing the property.

Final Thoughts

Rent-to-own homes come with both risks and advantages. If you have already given yourself the green light for a rent-to-own agreement, do not forget to weigh down the risks and benefits, because, just like in actually buying a house or property, going for rent-to-own is also one big decision to make.

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