How Does Rent to Own Work?

Rent to own - it's something every tenant who wants to  become a homeowner has wondered about. You rent a house, and you'd like to buy it, but you cannot get a mortgage right now, or you don't have enough saved for a down payment. Perhaps you have a weak credit score, and
need time to raise it up.

When a tenant has an option to rent to own, they put money down for an option agreement. This is a one time fee that is usually not refundable. The buyer has the option to purchase the property at some time in the future. The buyer is not obligated to purchase when the
lease expires.

If the buyer does not or cannot buy the property at the end of the lease, the option expires. The option fee is forfeited, unless specified as refundable. 

How big is the option? It varies. It can range between 2.5% and 7% of the purchase price. Sometimes option money may be applied to the purchase price when the sale closes.

So how is the purchase price determined for an option agreement?Sometimes the buyer and seller agree on a purchase price when signing the contract. Other times, they determine the price when the lease expires. This can be tricky, but may be to a buyer's advantage in a
declining market. Many buyers prefer to lock in the sale price, especially when home prices are on the rise.

Now, how does rent figure into this agreement?

The buyer pays the rent each month for a lease of usually one to three years. Many times, a percentage of each payment is applied to the purchase price. This has to be specified in the contract. For example, if the buyer pays $1,000 a month for rent, and 25% is credited toward the purchase price, the buyer will have a credit of $250 a month or $3,000 a year toward the purchase price.

Buyers should still have a renters insurance policy in place during the time of the lease, to cover any damages. Maintenance and repair requirements must be spelled out in the contract. Whose responsibility is it to care for the lawn, clean gutters, shovel snow, or prepare for a storm?

At the end of the lease term, if the buyer wants to proceed with the purchase, he or she will need to secure financing and proceed with the purchase. The best type of person for a rent to own agreement is one who needs time to get their finances together, to obtain financing, or to save for a down payment.

Buyers should consult with a qualified real estate attorney before proceeding into any rent to own agreement.

By Janet Hill