House Investment Options - Rent to Own

Entering a rent to own agreement with a landlord is an option for buying property when you can't afford to purchase a home right away. There are many reasons why you might go this route, such as to buy more time to save for the total purchase price, or to get to know the area before making a final decision. Not only do you benefit from having the option to purchase the home before it's offered to someone else, the landlord benefits from making money on the property, because they usually charge a higher rent. It's also a great option for landlords to offer to prospective buyers who are having trouble selling their homes otherwise.

Agreement

The agreement resembles a lease agreement, except for the addition of the option clause. This is where you agree to pay the landlord a fee to have the option to buy the house at the expiration (or earlier) of your lease term. It also specifies that your landlord gets to keep the money paid to buy the option if you don't purchase the property. If you do, then the option fee is applied towards your sales price. You should never sign a rent to own agreement that locks you into buying the property. It should just give you the option to purchase it, if you choose.

Sales Price

The sales price for the home should be negotiated as if you were purchasing a home outright. The only difference is that you're locked into that sales price during your rental term. For example, someone who signed a rent to own agreement to purchase a home before the recession might be facing a significant loss in market value if their lease is up and they decide to execute their option to purchase the property. That's one of the risks to consider when negotiating a sales price so far in advance of making a purchase. However, it could work the other way around, where the home value appreciates significantly. Also, you don't have to purchase the home ultimately, and your only loss might be the extra rent and option fee you paid.

Higher Rent

The incentive for a landlord to enter a rent to own arrangement is your promise to pay a higher rent. While the landlord reaps an immediate benefit of more money, you'll get that benefit in the long-term because the extra rent will be applied towards a down payment on the home. The premium rent should be excessive in comparison to the market rate. This can take some negotiating on your part. What you can negotiate depends on the landlord's circumstances. For example, if they're paying two mortgage payments, they may be open to just a small amount above the market rate for rents in the area. If the landlord is in no rush to sell the property, you might have to pay more.

Before you sign a rent to own agreement, you should hire an attorney to look over it. The terms may seem simple enough, but it's often what not in it that you have to worry about.

blog comments powered by Disqus