Sometimes a traditional mortgage may not be a great option for people. Especially those who need to improve their credit or get a down payment together. Instead of holding off on their dream of homeownership, people can consider a rent-to-own property instead. These properties can be a great option for those who want to still own a home but need to handle some financial issues first.
What is a Rent-to-Own
A rent-to-own is a type of home buying contract that let’s a person rent the property for a specific time frame before they purchase it. This agreement can be generally understood in two parts; the lease agreement and the option to buy. However, there are a variety of different agreements out there that will determine the obligations of the buyer and seller.
How Do These Agreements Work?
A rent-to-own can be a little complex. That is why it is recommended to get help from a rent-to-own professional when dealing with these agreements. The purchase price of the home is set by the seller of the property within the agreement. This contract will contain information about the pricing conditions like rent, whether or not rent will go towards the purchase of the home, the requirements of both the buyer and seller, etc.
Buyers may notice that the asking price of the property is a little bit inflated. That is because homebuyers try to anticipate the inflation cost of the property by the time it actually comes for the tenant to purchase.
Is a Rent-to-Own Right for You?
Maybe! Everyone has their own unique financial situation, lifestyle, and goals. If you feel like you want to buy a home but want to work on your finances first then this may be something you want to consider. You should speak to a rent-to-own professional to learn more and ask any questions you may have. Factors to keep in mind when considering this option include your finances, the current housing market, and the price-to-rent ratio of the property. The price-to-rent ratio shows whether or not housing markets are valued at a fair price. It looks at the home prices compared to the yearly rent in a specific location.
Benefits of a Rent-to-Own (Buyers)
Rent-to-own agreements can be a great option for buyers to consider because of:
- Bad Credit Eligibility
- Purchase Price Security
- A Chance to Try the House
Bad Credit Eligibility
It can be hard to build credit. That is why people who may need to improve their credit consider this option. Rent-to-own agreements may be able to provide individuals the chance to build their credit (during the rent portion) so that when it is time to buy, they are in a better place than they were before!
Purchase Price Security
People know just how crazy the housing market can be (heck, it even crashed back in 2008!). That is why homebuyers can benefit from purchase price security. When a person enters a rent-to-own agreement, they generally lock in the purchase price of the property (unless the contract says otherwise).
A Chance to Try the House
Purchasing a home is not a little decision. It is an extremely valuable asset and it is the place you call your home. When you enter a rent-to-own agreement you get a chance to try out the property before you buy it.
Drawbacks of a Rent-to-Own (Buyers)
Even though there are some attractive benefits that come along with entering a rent-to-own agreement for homebuyers, there are still some drawbacks to keep in mind:
- Inconsistent Pricing
- Less Power Over the Home
Every contract is set up differently. In some cases, people may face the risk of losing money if they choose not to purchase the home after the lease. If your seller is an unsavory character then they can enter this type of agreement with you and then try to make you not want the property so they can collect on money from that decision.
Even though this could be a benefit (like mentioned above), it could also be a drawback. Since the housing market is constantly changing, the property value could fall instead of rise. If this happens, you could end up paying way too much for a house that is worth significantly less at the time of purchase.
Less Power Over the Home
Even though you plan on buying the house, you must first rent it. Since you are a renter, you don’t have the rights to the property as if you were the homeowner. This means if the existing owner of the property has issues, they could negatively impact you. If the existing homeowner doesn’t handle their mortgage payments, then the property could foreclose, regardless of any agreement you had.
Benefits of a Rent-to-Own (Sellers)
Buyers have their own set of benefits and drawbacks when it comes to a rent-to-own property. Sellers can benefit from:
- Another Source of Income
- More Buyers
- A Higher Home Purchase Price
- Better Renters
Another Source of Income
During the rent portion of the lease, you may be able to consider that rent as an extra source of income. If the agreement doesn’t state that the rent will go towards the purchase of the property on the tenant’s behalf then it is for you to keep.
Since you provide more options to the buying market, you can expect to see more buyers. Instead of only offering your home to buyers that want a traditional mortgage, you offer your home to buyers that may want an alternative setup as well!
A Higher Home Purchase Price
Since sellers may need to account for inflation in a rent-to-own agreement, they can ask for a higher home purchase price in the contract. Even if the housing market falls, the price is locked in.
Renters in a rent-to-own agreement are likely to be better tenants. That is because the goal of a rent-to-own agreement for tenants is to own the property once the leasing period is over. Tenants are aiming to become the homebuyers of the property which means that they will want to keep it in a good condition.
Drawbacks of a Rent-to-Own (Sellers)
Even though sellers could have some nice benefits if they choose to enter a rent-to-own agreement, there are also some drawbacks that they should be aware of as well:
- No Purchase After Lease
- Slower to Sell the Property
- Missed Opportunity
- Home Prices Fall
No Purchase After Lease
Once the lease period is complete, the tenant may decide not to buy the home. If this happens, you still need to worry about selling your home again. You basically start the selling process over from the start. Luckily, it may not be a total loss since you will likely keep the money from their rent period!
Slow to Sell the Property
Since you basically start the selling process from step 1 if the tenant chooses not to purchase the property, it will take more time overall to sell your home. Even if they do buy, you still need to wait to sell the property until the rent portion of the agreement is over. Homeowners looking to sell their home right away can view this as a major setback.
Housing markets are always moving up and down. If the housing market raises more than the original asking price set in the agreement, you could face losing out on money. You take on this risk with this type of agreement.
Home Prices Fall
The housing markets can impact the home seller in many ways. That is why it is important to know that home sellers take on a risk if the tenant doesn’t decide to buy the property and the housing market drops. If the market value of the home decreases from the time you agreed on a price then you could end up losing money.