Imagine for a moment that you are perched on the cliff edge and that in order to reach the other side of the canyon in one piece, you have to leap over a very deep ravine. When you consider all of your alternatives, it appears insurmountable, and you simply can’t picture yourself succeeding. Then, from out of nowhere, somebody directs your attention to a bridge that is only a few yards away from where you are standing, and suddenly it appears as though all of your issues have been resolved!
When first-time homebuyers hear about “Rent 2 Own” options, they may get the impression that the process is similar to this one. There is a bridge that can be used to go from a renter to an owner instead of making such a large leap. But before you can get too worked up, let’s take a closer look at what you’re getting into if you’re thinking of going the Rent 2 Own route for this transaction.
How Does Rent 2 Own Function?
A homeowner has the intention of selling their home, but rather than conducting a conventional sale of the property (in which the home is put up for sale and ownership is transferred in a single transaction at closing), they will first rent it out. Let’s imagine that renter is you – a tenant who aspires to buy a home but who now lacks the principal payments or credit history required to apply for a mortgage. In this scenario, you are the tenant who aspires to buy a home.
The Leasing Choice
You will make an agreement to lease the property, but in addition to the standard lease conditions, you will also be required to pay what is known as a lease option payment. You essentially make a down payment in the form of a lease option, but in exchange, you have the offer to acquire the home at the conclusion of your rental agreement. This lease often lasts for two to three years as opposed to the standard term of 12 months. You should budget at least 2–3 percent of the total purchase cost for this option, with the potential to pay as much as 7–5 percent in some circumstances. If the average is 3.5 percent, this implies that you will need $7,000 to enter into the lease-to-own option. This is in contrast to a standard security deposit, which may be equal to half or one month’s rent, depending on the situation.
An Inflated Rent
On top of such expenses, you’ll probably also be responsible for paying an increased amount of rent every month. The reason for this is that in addition to the lease or rental fee, you are also paying additional money each month that will eventually be applied to your down payment when the time comes for you to purchase the property. For instance, if the rent for a similar home in your neighborhood is $1,500 per month, you should anticipate paying $1,750 for the home you rent. The additional $250 is now being kept in escrow by the homeowner, and it will equal $9,000 ($250 per month times 12 months times 3 years) toward the purchase of the house if you choose to go through with the purchase. Ultimately the increased rent acts as an investment.
The Eligibility Criteria
If you want to buy a home but aren’t quite ready financially, a Rent 2 Own agreement may be a good choice for you. This type of arrangement allows you to pay rent and eventually buy the property. You will have the opportunity to get your financial house in order, raise your credit rating, and save money for a deposit through the usage of these agreements, all while “locking in” the house that you would like to acquire in the future. You get the opportunity to create some equity in the property if the option of cash and/or a portion of the rent payments towards the purchase cost, which is something that typically happens.
Although Rent 2 Own agreements have historically been geared toward individuals who are unable to qualify for having to conform loans, there is a second field of candidates that has been frequently ignored by the Rent 2 Own industry. This group is comprised of individuals who are unable to get mortgages in markets that are expensive and non-conforming.
In high-priced metropolitan real estate markets, when large (nonconforming) mortgages are the norm, there is a big demand for an improved solution for people who are financially viable and have good credit but who either can’t acquire a mortgage or don’t want one yet.
As home prices continue to climb and an increasing number of cities are taxed out of conforming mortgage limitations and forced into residential mortgages, the burden of the problem is shifting away from individual buyers and onto the home financing sector. Even persons who are able to take care of their financial obligations may have trouble securing financing in these marketplaces due to the stringent automatic underwriting rules and the requirements for a down payment of 20 to 40 percent.
The fact that Rent 2 Own homes aren’t typically located in expensive markets is one of the things that sets Rent 2 Own apart from other similar businesses. However, all potential buyers of Rent 2 Own homes would profit from making an effort to include Rent 2 Own contracts with the following qualities that put the customer first: Attendees can build equity as well as capture market appreciation even if they choose not to buy the property because the option service charge and a fraction of each rent payment are used to buy outright the purchase price dollar-for-dollar. In addition, the rent and purchase costs are locked in for a period of up to five years.
Tips To Make The Most Out Of Your Rental Agreement
When looking at a house that you can rent with the option to buy it later, what procedures should you take? Make sure that you:
Selection Of Preferred Terms
Instead of entering into a lease-purchase deal, you should enter into a lease-option agreement.
You should get yourself a real estate attorney who is qualified to help you comprehend the contract and your rights and responsibilities under it. You should probably negotiate a few issues before signing the arrangement, but if it isn’t in your best interest, you should just walk away from it.
A Thorough Evaluation Of The Contract
Check that the following is clear to you:
The due dates and times
The choice fee, as well as the rent payments, along with the proportion of each that goes toward the overall purchase price
The process by which the price of the item is established
How to make use of the choice to buy that you have?
If there is a restriction on pets.
Who is accountable for things like upkeep, homeowner registration fees, property taxes, and other similar expenses?
What is meant by the term “maintenance”: simple maintenance like mowing the grass and raking the leaves, or more extensive work like repairing the roof.
Evaluating The Residence
Put in a request for a third-party appraisal, make sure the taxes on the property are paid up to date, have an inspection of the property, and check to see if there are any liens on the land.
Knowing The Seller
Check the seller’s credit report for indications that they may be having financial difficulties, and get a title summary to find out how extensive the seller has been the owner of the property; the better the situation is, the longer the seller has bought the house, and the more equitable they have, the better.
Double Checking the Fine Print
What are the circumstances under which you would no longer have the opportunity to buy the house? According to the terms of some contracts, you might lose this privilege even if you are just one day late on rental payments or if you fail to provide written notification to the seller of your intention to buy the property.
How Renting A Home Is Better Than Buying One?
Renting with the option to buy is essentially a hybrid method of purchasing a home in which all or a proportion of rental payments is applied toward the construction of ownership in a property over the course of time. In most cases, the proprietor of a residence will allow a renter to create equity in the property without the tenant having to pay back the amount or acquire a mortgage which is viable for the ones who prefer an easy accommodation option.
The Bottom Line
Potential homeowners can move into a house immediately under the terms of a Rent 2 Own agreement, giving them many years to work on repairing their credit ratings and/or save for a deposit before applying for a mortgage. In order to purchase the property, the Rent 2 Own agreement must, of course, be followed in all of its terms and circumstances. Before you accept any documents, it is critical to discuss the transaction with an experienced real estate expert who is able to explain the details of the contract as well as your legal options. This is true even when a real estate broker is helping you with the process.