Most of us have seen those ads for rent-to-own appliance and furniture stores. Maybe you’ve even used their services when you were in need of furniture but didn’t really have the cash on hand at the moment to buy that pretty new couch outright. But what about a bigger-ticket item, like, for example, a house? Yes, a rent-to-own house!
Can you really rent-to-own a house like you would a refrigerator? Is it a viable option for those buyers who might need a little extra time to save or build their credit? Just how does all of this work, and can it help you make your own dreams of homeownership come true?
We’ve researched the ins and outs of rent-to-own homes, as well as talking to experienced real estate agents about how a renter and landlord can enter into such an agreement, the pros and cons of doing so, and just what it means for you as a buyer if you decide to rent-to-own.
Let’s take a look at everything you need to know about rent-to-own homes.
So, what is a rent-to-own house, anyway?
Simply put, a rent-to-own house is one that is currently being rented, and the owner gives the tenants an option to buy it after they’ve lived in the house for a certain amount of time. But the process itself isn’t necessarily that simple, or even that common.
Rent-to-own homes aren’t for everyone, but they can be a good option for some buyers, especially those who have low or no credit, or who don’t have a lot of money saved yet.
New Mexico agent Valerie Almanzar, who has more than 15 years of experience in the real estate industry, says that while rent-to-own properties aren’t the norm these days, they can and do still happen. “If the owner is looking to put the property on the market at some point and has a tenant in place who wants to buy, they might consider a rent-to-own.”
How do rent-to-own contracts work?
When it comes to a standard rent-to-own agreement, it’s really up to the buyer and seller to decide the terms they want attached to the deal. Most agreements stipulate that the buyer will rent the house for anywhere between one and three years before purchasing it, and the sales price is usually set at the time of the agreement.
The buyer will also often have to pay an upfront deposit toward the down payment, which is nonrefundable if they change their mind. Additionally, a certain amount of the monthly rent is also typically stipulated to help cover the buyer’s closing costs or down payment.
“These types of agreements usually have a predetermined time limit, like a year,” says Almanzar.
“For example, monthly rent on the house is $2,000, and the buyer agrees to pay an additional $300 a month, which will go toward closing costs on the purchase.”
Buyers may also be responsible for all maintenance and repairs of the property for the duration of their lease.
Buyers should also continue to save separately, as the rental amount that goes toward closing costs or down payment probably won’t be enough to cover everything. They’ll also need to come up with any additional buyer-designated costs associated with the purchase, which can vary by state and loan programs.
Another decision is whether to use a lease purchase agreement (not recommended for buyers) or a lease option to purchase — which still provides the tenant with the possibility of buying.
In a lease-option agreement, a clause is added to the lease that states the tenant will get the first right of refusal if the owner decides to sell the property.
This can be good if a tenant already loves the home they’re renting and wants a chance to buy it while continuing to save for their purchase. The seller can determine the terms of the option, which may or may not include a pre-set purchase price for the home.
A lease purchase means that the buyer will be obligated to buy the house at the end of the contract — it’s not an option anymore.
The lease purchase can be a “buyer beware” situation. If a buyer decides they don’t want the house, it can actually be considered a breach of contract, with serious repercussions.
What about the appraisal and inspections? And getting a mortgage?
While getting an inspection on a house before you buy it is always a good idea, it doesn’t mean the seller will be responsible for any needed repairs.
“Sometimes a buyer and seller agree that the home inspection can be waived since the buyer has already been living in the home and probably knows of any issues,” says Almanzar. But if you’re buying, you might want to spend the money on an inspection anyway, just so you’re fully aware of the home’s condition and can make an informed decision on the purchase. And that’s something you should probably do before you sign the agreement.
Qualifying for a mortgage isn’t affected by renting to own, and, says Almanzar, having a little extra time could even be a good thing.
“The buyer has time to build credit and establish a rental history.”
A mortgage lender will still want buyers to meet all the standard qualification requirements, including adequate credit, employment, and debt-to-income ratio.
Buyers should also be aware that even if they have an agreement with the seller that inspections aren’t needed, mortgage lenders will still require an appraisal of the property to determine the value of the home. And if that appraisal comes in lower than the purchase price, the buyer and seller will have to negotiate the cost difference.
Pros of a rent-to-own
According to Almanzar, a rent-to-own agreement can be helpful for a buyer who needs to work on their credit, save — or, if they just started a new job, to build a work history. Sellers also can benefit, she says: “They have a person living in the home that intends to purchase it, which will hopefully help them take good care of the property while they are renting.”
Sellers who don’t want the hassles of putting their house on the market, having prospective buyers traipse through their property, or potentially waiting for the perfect offer might like the idea of a rent-to-own. In certain markets, they might even find it to be a better option than trying to sell, as they already have buyers who want to own the property.
As a buyer, renting-to-own means you get a chance to try the house on for size before you buy, which can be helpful if you aren’t sure what kind of house will best suit you. And if the sales price of the house is pre-set, you might also get a little bit of instant equity if home prices go up more than expected during the year or years that you’re renting the place.
The downsides of renting-to-own
For sellers, the drawbacks of a rent-to-own agreement can include having buyers back out of the deal when it comes time to purchase the home.
“There is a high percentage of people who don’t go through with the purchase,” says Almanzar. “The buyer might change their mind after looking at other properties — or, since many people go with a rent-to-own because they need to get credit or finances in order, sometimes they simply aren’t able to do so in time to buy.”
Backing out can also mean some serious repercussions for buyers, as they are likely to forfeit any deposits they’ve made toward the house, as well as extra money paid toward closing costs. Buyers should also be aware that things like late rent payments can affect their contract; some contracts have clauses in which the buyer can lose their entire deposit if they are late on their rent.
If the price of the home is determined in the initial rent-to-own contract, a changing market could mean losses for either party. If the home’s value goes up, the seller can lose money on the sale. If prices go down, the buyers not only don’t get the best deal on the home but there is the possibility of the appraisal coming in lower than the sales price, which could mean the buyer will have to come up with more cash.
How to find rent-to-own homes
While rent-to-own houses aren’t common, they do exist, and an experienced agent can help you make it happen. Almanzar says that as an agent, she has worked with both buyers and investors to secure rent-to-own agreements.
“If we are looking at it as a way to represent the buyer, we can help them figure out what the end goal is and any ramifications,” she says. “We’ve also worked with investors to put this kind of scenario together.”
So if you think you might be stuck renting forever, think again! With a willing seller, solid contract, and a little help from a real estate professional, you could potentially find your way to homeownership by way of a rent-to-own house!
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