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Understanding Rent-to-Own Agreements

Rent or Own, let Bittinger Team, REALTORS help.

You may have heard the term “rent-to-own” before. Also known as a lease option or lease-to-own agreement, this arrangement means the buyer signs a contract with a seller stating they agree to rent the home for a specified period until lease ends. At that time, they may exercise their option to buy the home.

This is not a very common method of home buying, however. There are only a small number of rent-to-own properties on the market compared to those available for sale or lease. Since these contracts favor landlords or owners, it can put the renter in a vulnerable situation.

Not everyone’s path to home ownership is the same. There are some advantages to entering a rent-to-own contract.

What You Need to Know About a Rent-To-Own Agreement

Not sure if rent-to-own is right for you? Here are some things you should know:

  • Buyers who aren’t ready to purchase a home outright benefit from a rent-to-own lease. It gives them time to build their credit and save for a down payment.
  • Sellers benefit from the taxes as they own the property for the first few years of the lease agreement. It also leads to better tenants. Because a tenant has long-term interest in the home, they are more likely to take good care of it.
  • For a rent-to-own agreement, the buyer pays something called option money. This is a non-refundable, one-time payment that gives the buyer the right (not obligation) to purchase the home when the lease expires. It should be noted that if a buyer is interested in purchasing a home, not all loans require 20% down. Before entering in a rent-to-own agreement, it’s a good idea to consider all your options for purchasing a home.
  • Some contracts give a buyer the option to purchase the home at the end of lease, but the buyer is not obligated. Make sure you fully understand the terms of your agreement before signing.
  • In most contracts, a percentage of each monthly rent payment goes toward rent credit. This is applied to the purchase price. Make sure you understand how much of your money is going toward rent vs. the purchase price.
  • The seller could lose the house for any number of reasons: not making the mortgage payment, being sued, getting a divorce, taxes, etc. This may leave the buyer stranded with no options for recourse. In these cases, the potential buyer may lose any money invested in the agreement.
  • Before signing anything, buyers can negotiate for items like maintenance, rent credit and option money. We suggest having a professional look over the documents.

Bottom Line

Rent-to-own isn’t for everyone, but there are some valid reasons to enter such an agreement. Let’s plan a meeting to discuss your options and explore whether buying a home or rent-to-own is right for you. Contact us today to set up an appointment.

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