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What to Know About Renting to Own

Written by Posted On Friday, 13 March 2020 09:16
What to Know About Rent to Own Agreements What to Know About Rent to Own Agreements

Renting to Own Explained

Renting to own can offer many advantages over purchasing outright. It means that you don't need to save up a significant amount for the down payment and can move in straight away if you want. Then when the contract is up, you have the chance to purchase the home.

Renting to own could be a great way to get into the property market, but it does come with downsides too. Keep reading, and you'll find a detailed analysis of both the pros and cons of rent to own agreements.

Understanding rent to own is a critical exercise before proceeding with this kind of arrangement. One of the most vital things to understand about rent to own is that there are two different types of these agreements: a lease-purchase agreement and a lease-option agreement. You can get a detailed explanation of these scenarios in the article at Maximum Real Estate Exposure.

With a lease option agreement, you'll have the option of purchasing the property after an agreed-upon time frame. On the other hand, if you agree to a lease-purchase agreement, you are legally obligated to buy the property. The key take away is to know what kind of contract you are signing upfront. It is highly advisable to use a real estate attorney when getting involved with renting to own.

How Does a Rent to Own Agreement Work?

Don't expect all agreements to operate in the same way, but they will often feature the same processes. Let's take a further look at the typical rent to own arrangement.

Deciding the purchase price. The agreement will set out when the cost of the house will be determined. It could be the current market value or a future prediction of value. It also could be the value of the home when the agreement expires.

What are the lease terms? The agreement will lay out the rules for when you can exit the deal without purchasing the home. It will give you the time frame for when the purchase option will expire.

Paying rent. The amount you will be paying in rent will be set out in the contract. The lease usually is going to be higher to take into account the purchase option, with an amount added, which acts as credit towards your purchase of the home.

Who is doing any necessary repairs? Within an agreement like this, you may be required to maintain the property. This is going to add to your expenses, but if you end up purchasing, it makes sense. It is essential that you have a family budget, including funding set aside for repairs. Murphy's law states that there will be issues you'll need to address.

The option to buy. The seller will require you to pay money for the opportunity to purchase the house when the contract ends. It is likely going to be a percentage of the selling price and will count towards your purchase.

The closing costs. The agreement will set out how much of the rent you've been paying will contribute to reducing the purchase price of the home. This is a vital piece of information for any rent to own agreement.

The Benefits of Renting to Own

The idea of renting a home with an option to purchase can seem like a great opportunity. It has a few clear benefits; let's look.

You are building your down payment. Some of the higher rent you will be paying is going towards the purchase of the home and means that you are forced to contribute to the down payment for the house. If you have trouble saving, this can be an excellent option.

Qualifying for a mortgage. If you don't currently qualify for a loan, putting off the time when you need the mortgage can seem like a smart choice. When the rent agreement ends, you could be in the financial situation to get a better mortgage at a lower interest rate. There is now an abundance of mortgage programs for first-time home buyers, including those that offer low down payments.

The Negatives of a Rent to Own Agreement

Unfortunately, while the chance to purchase the home you are renting can seem like a terrific option, it doesn't always work out as people hope. Some potential pitfalls can cause problems with such a contract.

You will be paying a higher rent. While this may go towards the final purchase price of the home, it is money wasted if you don't take up the option. It could be a better solution to rent an ordinary rental home and save the additional money to put towards a down payment in the future. This way, the money remains in your control, and you don't need to worry about problems with the agreement.

No refunds. The option money that they will want you to pay won't be refunded should you fail to take up the purchase option. This could be a significant amount of money that you will lose, along with the higher rents.

You might change your mind. If you decide that you don't want to purchase the home when the contract ends, you will have spent a considerable amount extra for no reason. Sometimes you can even lose the chance to take up the purchase option. If the landlord goes into foreclosure on the home or otherwise decides they want out of the agreement, they may have the opportunity.

Unfavorable contracts. The agreement will work in favor of the landlord and can mean you lose the option to purchase if you miss a payment or for other reasons. Signing up to a rent to own contract can seem like an ideal opportunity, but there are many ways in which it can go wrong, leaving you out of pocket. You have to be very careful if you are considering entering into such an agreement, and could be far better off saving your money for a down payment.

Final Thoughts on Rent to Own Agreements

For some folks, a rent to own agreement is the perfect compromise between renting and owning a home. For others, it can be a mistake from the get-go. Before agreeing to a rent to own contract, it is highly advisable to really think about whether this is the best option for you. If you come to the conclusion that it is, make sure you hire a qualified real estate attorney who can look over the contract.

You'll want to avoid agreeing to something in the contract that heavily favors the landlord. Rent to own is not something that should be taken lightly. Make sure you know exactly what you're committing to so you don't put yourself in a financial bind.

Other Helpful Rental and Moving Resources

Get more vital information to help make informed decisions when you are renting and moving.

  • Pros and cons of buying vs. renting - are you having a hard time determining what is your best housing move at the current time? Are you trying to decide between buying and renting? In the article at Before Its News, you will get a detailed analysis between going with a rental or purchasing a home. Use the information to make the best financial decision.
  • What to know before renting - Are you thinking about renting an apartment or home? Before doing so, you should have a firm grasp of some of the most crucial considerations. In the article at Realty Executives, you will get a comprehensive understanding of what is essential in your search for a rental property.
  • Renting a moving container - are you going to be moving soon? One option that people like to research is getting a moving container. The most recognizable brand in the self-container industry is PODS. See what you need to know about renting a PODS container in this valuable resource at Active Rain.
  • Get rid of junk before moving - one of the best times to toss unwanted items is when you are moving. The largest junk removal company in the industry is 1-800-got-junk. See a detailed review of what you need to know about a junk removal service.

Use these valuable resources to make excellent planning decisions before your next housing choice.

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Bill Gassett

One of the top RE/MAX agents in New England over the last decade plus. Providing exceptional real estate services to buyers and sellers in the Metrowest Massachusetts area including the following communities: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.

See my real estate website at Maximum Real Estate Exposure - one of the most visited real estate sites in Massachusetts.

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