Reasons Why Rent to Own a Home Is so Popular
“Rent to own a home” programs serve as the perfect solution for many individuals hoping to purchase the house with a closing date set into the future. Rent to own utilizes a unique finance agreement. It usually involves the property owner collecting monthly rent from the renter for a predetermined period and closing on the house at a later date.
Because of the recent recession and the collapse of the housing market, homebuyers with available financing options became extremely limited. As a result, home sellers made rent to own a home options available to potential buyers. Often recognized as a “lease option,” the financial agreement usually requires additional rent money every year set aside as a part of the down payment. Some agreements also include an upfront fee averaging five percent of the home’s purchase price.
Purchasing the home through a lease option agreement enables individuals the ability to obtain a house at a time when they might be challenged arranging financing. Others use the method as a way to purchase a house by incorporating the down payment into their monthly rent.
The Advantage of Rent to Own
Because the purchase agreement usually has a closing date set 12 to 36 months away, it provides the home buyer opportunities to enjoy the neighborhood without making a major purchase commitment. One of the reasons homebuyers agree to a “rent to buy” deal is the ability to generate the down payment in monthly rent. This helps to improve the buyer’s credit profile, making it much easier to obtain a home loan.
As an example, if the home is available for $200,000, the buyer might be required to put down a $5000 upfront fee. On top of that, the buyer’s average monthly market rent of the home set at $1000 might also include an additional $400 a month toward the lease option agreement. Within three years of renting the property, the potential home buyer will have saved up nearly $20,000 toward the down payment.
This is especially beneficial to homebuyers at a time when banking institutions make it much more challenging to purchase a home. Often times, lenders insist that borrowers obtaining a mortgage put down 30 percent of the total home purchase price instead of the traditional 20 percent.
A Win-Win Scenario
Many individuals offering a “rent to own a home” option have purchased a new home in a different location and are unable to sell the old one. In an effort to offset the mortgage costs on their old home, they offer a lease agreement with a closing date set a year or more into the future. For example, many people are buying a new home in the far East El Paso area due to all the new home construction out there but then those people need to do something with their first (or other) home.
Negotiating a Price
Before any potential home buyer enters into a lease option agreement, there is room for negotiation with the seller. This is important for both the buyer and the seller; because once the agreement is signed the home’s sale price is locked in for the entire rental term. This could hurt the seller, if prices begin to rise significantly, or hurt the buyer if the price of comparable homes begins to plummet.
Like any business contract, a “rent to own a home” agreement has both risks and disadvantages for all parties involved. However, many of the risks can be avoided with a properly negotiated contract. Clearly stating who will be responsible to fix a leaking roof or backed up sewer pipe can avoid many of the hassles the seller and potential buyer may experience during the life of the contract.
Before signing, both parties must have a clear understanding of all the possible pitfalls. That said, the tougher lending standards and declining housing market have made rent to own option a viable solution for both the buyer and the seller.