What is a rent to own or lease option home?
A lease option home purchase (also rent to own purchase” or “rent to own”) is a lease-agreement combined with an option-agreement to pay for the house within a stipulated time, typically three years or fewer, at an agreed cost. The borrower pays an option charge, 1% to 5% of the cost, which is credited to the buy value. The borrower pays a monthly rent, and an extra rent payment that is also credited to the purchase price. If the purchase option is not exercised, the buyer forfeits both the nonrefundable option fee and the rent premiums paid.
As with any kind of monetary contract, rent to own deals can be organized in such a way that all the reimbursement flow to one of the parties and nothing to the other. Buyers especially need to be watchful. But rent to own strategy have a solid fiscal reasoning, which means that they can be organized so that both parties advantage.
Contract Features of a rent to own
A rent to own has 6 main necessities. The sales price of the dwelling and the rent are market determined, yet subject to compromise just as in a straight purchase transaction or rental transaction. Buyers frequently know less about the marketplace than sellers, which places buyers at a weakness unless they do some research, which is sensible.
Buyers commonly like better a lengthy option period since it provides extra time to build equity and patch-up credit. A lengthy period can boomerang on them, however, if they are never able to put into effect the option, they lose the rent payment they have been paying all the while, in addition to the nonrefundable option fee. Sellers commonly like better a short option period, but not too short, or you will never purchase the house.
The option fee and rent payment are viewed in different ways by buyers and sellers. To the renter/buyer they are equity in the home they will soon purchase. Fully anticipating that they will exercise the option, the only cost is interest they would otherwise have earned. To sellers, on the other hand, these payments are the greatest promise that their properties will sell. If they do not sell, the payments are retained as profits. The advantage to the seller commonly exceeds the cost to the buyer making the lease option transaction a workable win-win.
Using a Rent-To-Own Agreement To Buy
The rent to own offers home ownership favorable conditions to consumers who can not qualify for a credit from any source, but who are prepared to bet on themselves. The wager is that before the rent to own period expires, they will qualify for the financing they require to put into effect the purchase option. During the rent to own period, they have the opportunity to rebuild their credit and build equity while living in the home.
Consumers who need to reconstruct their credit rating for the period of the rent to own agreement must understand paying their rent punctually will not do it. A renters rent payments are not used to compile their credit score. Fair Isaac, the company that developed credit scoring, recently has unveiled an “expansion” score based on nontraditional credit data, it does not yet include rental payment information from individual renters. Rent to own buyers who need a improved credit score must spotlight on their credit cards, loans and other bad debt.
The right not to exercise the option is of value to buyers, even though it is costly. You may find there is something seriously wrong with the house, neighborhood, or even the neighbors. The money left on the table with a rent to own is often much less important than the cost of an outright purchase followed by a quick sale.