As a real estate agent I get a lot of questions on rent to own homes and so I thought I would give you the low down on what rent to own is, and the pitfalls you need to look out for as a buyer.
You can watch the video or read on for a summary!
Rent to own is known by a few terms including lease to own or lease options. It is essentially renting a home for a certain period of time, after which you have the opportunity to buy the home. Many potential buyers believe that it means simply agreeing that you now own the home and you will pay rent for it until you have paid it off. That is generally not the case, most rent to own homes have a set time in which you can buy the home with a traditional loan. The rental period gives you the time to bring up your credit score, save up for a down payment or get whatever you need in order to qualify for a traditional loan.
A rent to own contract will detail several things: your rent payment, length of your lease, what you need to do to buy the home, the time you have to buy the home, how much you will pay for the home, potential rent credits, and an option fee which may be named something else.
Option Fee and Rent Credits
As part of a rent to own contract, there is typically an option fee. This fee is nonrefundable. This is done as the owner wants to know you are serious about buying the home because they cannot sell it to anyone else during this time. However, this fee cannot be counted as a down payment when you go to buy the house with a loan. That means you still have to come up with the down payment. So if you are not able to buy the home when it comes time, or you decide not to buy the home for any reason, you do not get the option fee back.
Rent credits can also not be counted as a down payment or anything else on a bank loan. So any option fee or rent credit can only be taken off the sales price. So if you agree to buy the home for $100,000 and you paid $1000 option fee and received $1200 in rent credit, when you get a loan for the home you and the seller would have to agree that the $2200 would be subtracted from the agreed upon sales price of $100,000 so the actual sales price for your loan would be $97,800.
In a normal home purchase the buyer has the opportunity to conduct inspections on the home by professionals. This can include an overall home inspection, radon, well and septic, lead paint, and more. If the inspections show problems you can cancel the contract and get your deposit back. When you rent to own a home, the contract is almost always AS IS which means you have to buy the home in it’s current state, and you are typically not even told you can do inspections let alone given an opportunity to do them and have your option fee returned if you are not happy with the results and do not want to buy the home. A lot of times owners offer a home for sale as a rent to own because they know there are issues and cannot sell traditionally. They count on the buyers being uneducated about the home sale process.
This can also cause problems if you do try to get a loan for the home when it comes time to buy. Banks perform appraisals in order to determine if the home is worth what you are paying. If the bank determines the home is not worth what you have agreed to pay you risk losing the home as well as your option fee, rent credits and any work you may have put into the home.
What About the Mortgage?
A seller can sell their home as a rent to own home whether they still have a mortgage or not, just like a normal rental home. Most sellers keep up with the mortgage, and renters have some protections if they do not and the home is foreclosed on. However, if you have paid an option fee, are relying on rent credits, etc, and the seller is not making mortgage payments, you will lose that money if the home is foreclosed on and you cannot buy it as planned.
If you are thinking about looking for a rent to own home, I highly suggest speaking with an attorney and having them review any lease and contract before you sign to protect your own interests.