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Jun
04

Rent-to-Own – How it Works?

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The dream of home ownership is not impossible even with little or no down payment or distressed credit. You can find homes that an owner has for sell and who would be willing to rent or lease you the home. Negotiate the purchase or rent-to-own contract that will allow a portion of your rent to go to the down payment. Find the right company to help you with this option of home financing or use a real-estate attorney to set the contract in motion.

  • It is possible to rent or lease with option to purchase a home with little money down. This type of home purchase is also known as rent to own, rent option to buy or lease with an option to purchase.
  • There are companies or real estate brokerages that specialize in this type of home purchase and will guide you through the pitfalls and legalities of rent-to-own purchases.
  • Negotiate with the seller to have a portion of your rental payment go toward the purchase. You may be able to specify up to 50 percent of your rental payments be the down payment or equity of the home. To have a portion of your rental payments go toward purchase of the home you may need to follow several guidelines.
  1. Pay your rent on or before the due date. If you pay late, no credits will be issued for that month.
  2. Maintain the home. You will be required to do renovations, repairs, and upkeep that will build equity in the home. Major repairs will always be the responsibility of the owner, but your maintenance attempts will go far in assuring the landlord of your intent to purchase.
  3. Many contracts require a non-refundable payment of two to three percent. Negotiate to have this percentage go toward the purchase of the home.

If you enter a rent-to-own contract, be aware that the monthly rental price will be a set price and the non-refundable payment is typically a first and last month’s rent payment. Set up the contract to have the option payment go toward the purchase price of the home.  Rent-to-own is a very viable alternative to traditional bank mortgage payments. It is a way to help potential home owns find the home of their dreams even if they do not have the traditional five to ten percent down payment. Often rent-to-own contracts overlook credit problems and use the non-refundable option as security.

The Concept of Rent to Own Homes

If you plan to own a home but are unable to obtain financing this time, leasing a home with an option to purchase may be your best option. A lease to buy can make your rent money work for you instead of making your landlord rich. Typically rent to own homes offer rent credits that reduce the final purchase price over time.

Here’s how it works:

A home is made available via a standard lease with one important addition of an option to purchase that home at an agreed price over a specified time period usually one or three years. In order to avail that option, the renter/buyer must pay a one-time, NON REFUNDABLE, fee called the option consideration. The exact amount is negotiable, but it is usually ranges from 2.5 to 10% of the purchase price. A fair contract will credit the buyer 100% of that option consideration upon closing of the sale. Additionally, a negotiated percentage of all rent payments should be applied toward the purchase price of the home. Other typical terms and conditions one might expect to find in a contract which is as follows:

Equity Building

In order to receive a rent credit of 50%, time is of the essence. You MUST pay your rent on or BEFORE the due date of your lease, typically the first of the month. This means it must be received by the lessor (landlord) on or before the due date. Any payment received after the due date will result in a 0% rent credit for that month, a late fee may apply and you will not be building any equity.

Regular Maintenance

Maintenance is the responsibility of the Tenant Buyer. You are now renting to own and homeownership requires regular minor maintenance, which includes things like broken windows, clogged drains, peeling paint, broken appliances, burnt out bulbs, lawn work/snow removal, etc. If any major repairs are required to ensure habitability, the owner remains responsible.

Option Consideration

You need to have Option Consideration, which is typically 2.5% to 10% of the purchase price of the home. It is a non-refundable payment, of which 100% is credited toward the purchase price, which binds the lease purchase contract.

Here’s an example transaction:

We have a nice 3 bedroom, 2 bath single family home located in a near west suburb of Milton, Ontario in a great neighborhood with good schools and a strong community. It has been freshly painted, cleaned, and is ready to move in. The purchase price will be $315,000. Monthly rent payments will be $1,600 and you will receive a 50% rent credit of $800 per month. You need between 2.5% and 10% in up front Option Consideration. Let’s say your budget allows for $12,600 for Option Consideration. This equates to approximately 4.00% ($12,600/315,000). You will also need $1,600 for the first month’s rent for a total initial payment of $14,200.

It’s important to note here that option consideration is not a security deposit but a non-refundable payment toward the purchase price and is 100% credited toward reducing the price of the home.

Now let us suppose you paid all your monthly rent on or before the due date and you choose to buy the ‘rent to own home’ at the end of the 24 months lease purchase contract. You will have $31,800 in equity before even you own the home. Here’s you do the math:

– Lease Purchase Price – $315,000

– Less: Option Consideration paid at lease signing – $12,600

– Less: 50% rent credit of $800/month x 24 months – $19,200

– Net Purchase Price after credits – $295,800

You started with $12,600 and by paying your rent on time your equity position grew more than 152% (another $19,200) for a total of $31,800 with 24 months. Not a bad deal! Many people find it nearly impossible to save $19,200 in two years with all the costs of living constantly on the rise.

What’s the catch?

Now you may be thinking, “OK, what’s the catch? This sounds too good to be true.”

Answer, there is no catch.

Possible reasons for landlord/seller for entering into rent to own agreements

  • Needs to maintain ownership for at least one year for tax purposes.
  • Unable to get a fair price due to local conditions.
  • Tired of doing frequent maintenance.

Advantages for the tenant/buyer

  • Tenant becomes the Tenant Buyer through rent to own arrangement.
  • There is an immediate sense of pride in home ownership.
  • Tenant Buyer adds value to the community.
  • They take proper care of the property having feeling of ownership.
  • Goo feeling that rent money is working for them
  • Reduction in the purchase price.
  • Building equity in home ownership.
  • Initially, no bank or lender involvement.
  • Buying time to improve poor credit history.

Rent-to-Own – How it Works

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