Guides Rent To Own Renting

Quick Rent-to-Own Guide

With a red-hot real estate market being the new norm, more and more attention is being brought to the difficulties of homeownership for first-time buyers. However, with a steep learning curve for real estate lingo and time being the most critical factor in this market, one option stands out for homebuyers who may need a little more time to make their decision: Rent-to-Own.

Overview of Rent-to-Own

Rent-to-Own is an agreement between a buyer and a seller in which the seller agrees to allow the buyer to live in the home as a tenant paying rent and apply some of that money towards the purchase of the home. It’s a great way to connect more people interested in being homeowners with sellers that are willing to work around some of the red tape of the real estate industry.

Who Is Rent-to-Own Best Suited For?

Rent-to-Own typically has been best suited for those that do not fit the traditional lender’s “ideal candidate” profile. People that are working on getting their finances in order, improving their credit scores, or having trouble saving for a down payment are the most common people to use the Rent-to-Own agreement as it allows for these barriers to be lessened.

Other people that have been utilizing the Rent-to-Own process are urban residents in uber-expensive markets like San Francisco and New York. The magnitude of mortgages that need to be taken out in the buyer’s name can dissuade lending companies from helping first-time homebuyers borrow money to purchase homes. By utilizing Rent-to-Own, these buyers can save up a large down payment while still locking in the home they would like to purchase.

Rent-to-Own agreements can technically be used on any property, although it may take a little convincing on the buyer’s part. Some sellers may be prepared to go through traditional means of selling their homes. Still, with a little education and persuasion, it is possible to get a seller to agree to terms that allow the buyer the right to a lease-option or lease-purchase agreement.

Lease-Option vs. Lease-Purchase: What’s the Difference?

One critical variation in Rent-to-Own agreements is the Lease-Option versus Lease-Purchase. A Lease-Option is an agreement that the seller will not sell the property to any other buyer for the duration of time specified, and the buyer has the option to purchase it at an agreed-upon price within that time if they would like. This is not a binding agreement, and the buyer is free to walk away from the purchase (but not the lease!) of the home at any point.

On the other hand, Lease-Purchase agreements are binding and state that the buyer has agreed to purchase the property from the seller for the agreed-upon price. Therefore, the buyer cannot walk away from the deal without forfeiting the rent money paid to the seller.

Other Negotiation Terms to Consider

Rent-to-Own is a negotiation and should be considered as such. Things like the price of the home, the duration of the lease and agreement, and the amount of rent being applied to the principle of the home are all negotiable. Buyers should be aware of these factors and work with the seller to ensure that a reasonable and fair transaction ensues.

Doing Your Due Diligence

As with any home purchase, you must do your due diligence when agreeing to any Rent-to-Own terms. A little extra work now will avoid a huge financial mess later and protect you from any liability.

Verify the Sale and Seller

The first step in your due diligence is to ensure that the transaction is legitimate. As a rule of thumb, if the deal seems too good to be true, it probably is. Next, check local property records to ensure that the seller is the actual owner of the property, and do a background check on the seller to verify that they’re not in any financial trouble that may end up hurting you in the long run.

It’s also strongly advised to ensure that the title is clear of any liens and to review past property tax records to verify there isn’t a backlog of taxes that need to be paid. Also, check with the local courthouse in your area to obtain records and confirm with the seller if you do find something.

Schedule a showing and a home inspection to know as much about the property as you can before agreeing to anything. This allows you to get a chance to see the property, ask any questions that you may have, and take note of any issues or damages that may be coming with the home.

Get Your Finances In Order

The agreement between the buyer and seller is only beneficial to both parties if the buyer can actually purchase the property. It’s okay if you can’t afford a large down payment at the time of the agreement, but you should have a plan to save up the money you need to purchase the property.

Obtaining pre-approval from a lender is also a great first step in getting your finances in order. The lender will be able to help you get an idea of whether you qualify for a loan, what your monthly payment would look like on the sale price, property taxes, mortgage insurance, HOA fees, and any other fees built into the mortgage.

Consult with Legal Help When Under Contract

As with any legal agreement, when you’re signing on the dotted line, it’s best to consult a legal representative, so you know exactly what you’re getting into. As mentioned earlier, the contract is negotiable, so locking down the terms and conditions with the seller in writing is critical to the Rent-to-Own process.

The home buying process is an exciting time for any buyer, and it’s no different if you’re looking at Rent-to-Own opportunities. So make sure to take your time, do your due diligence, and enjoy every second of the journey. It is going to be your new home, after all.


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