Since the dawn of time, humans and other animals alike always looked for essentials for survival, and that mainly involved food, water, and shelter. While some animals live their lives changing their homes frequently, humans have evolved beyond that. As we developed cities, countries, and towns, one of our main goals became to have a home to call our own. Not to deny the existence of nomadic folks, but it’s easy to say that most people just want to stay put in one place. Alongside that development process, we also developed standards that we consider when evaluating potential places to call home. A place we live in must be safe, sanitary, and have basic utilities such as electricity, gas, water, and in the 21st century, internet access.
Obviously, renting a place is always an option. Renting gives you a wide array of places to choose from. But it also comes with its own set of cons. In comparison with owning your own places, renting can be quite restrictive, as the place is not under your name. But also buying your own place can be expensive, and it requires main qualifying terms to achieve. Within the traditional process of buying a place, you’ll probably need to get a mortgage, have enough money for the down payment, and will probably need to have a decent credit score to make that happen. What if there’s a different route you can take towards getting your own place?
That’s where Rent-To-Own agreements come in. As you can probably understand from the name, the process involves renting a place until you own it. So, let’s discuss what Rent-To-Own is all about, what we should look for when considering it as an option, and the kind of agreements/contracts involved in the process.
What Is Rent-To-Own?
To put it in simple words, rent-to-own is a form of rental lease that gives you the option to buy the house eventually. Typically, these lease agreements specify that the tenant buys the house by the end of the lease agreement. The agreement will often involve 2 parts:
- A standard lease agreement
- An option to buy
While it may sound pretty straightforward, the process can actually involve a lot of small details that you should look out for. In this article, we’ll also discuss a variety of factors that can help you decide if certain homes are worth your investment.
There’s Something You Might Need to Pay for First
As you may know, not every rental house is up for sale. Landlords that decide to sell their place down the road, will always make sure that they’re secured against losses if plans fall through. That’s why there’s something called an ‘option’ fee. The option fee is usually paid upfront and is usually non-refundable too. The option fee is what gives you the ‘option’ to buy the house at some point in the future. Option fees don’t have a set price or percentage of the house value. So, the amount paid as an option fee will be for discussion between you and the landlord. However, typically, the option fee is somewhere between 1-5% of the purchase price.
Not All Rent-To-Buy Agreements Are The Same
When it comes to renting a place till you buy it, there can be 2 different types of agreements. You should really pay attention to the kind of agreement you’re getting involved in, as they carry different legal obligations.
Lease-Option contracts: These contracts show that the tenant is interested in buying the house by the end of the lease term. However, at the end of the lease term, the tenant can opt to not buy the house. At that point, the ‘option’ to buy just expires with no further consequences.
Lease-Buy contracts: These contracts indicate that the tenant “will buy” the house when the lease term is over. So, if you sign a Lease-Buy contract you might be forced to buy the house by the end of your lease, even if you can’t afford it.
This is going to be a good starting point to remind you to really pay attention to what you’re signing up for. It’s probably a good idea also to have a real estate attorney go over the contract before you sign it.
How To Decide On The Purchase Price
Deciding on the price you’re paying for a house you’re buying in the future can be a little tricky. In some agreements, the tenant and the landlord will agree on the purchase price when signing the lease agreement. In other instances, the 2 parties will agree on the purchase when the lease duration is over. Many tenants/buyers prefer to decide on the price at the start of the agreement, to avoid any unexpected inflation in the real estate market prices. Renters/buyers and landlords will often agree on a purchase price that is higher than the current market price. That makes sense since the buyer plans on buying the place in the future when the market value is likely to increase.
How Much Of My Rent Goes Towards Buying The House?
Under rent-to-buy agreements, a tenant often pays more in rent than if they were to just rent the place and leave after. So let’s think of a hypothetical situation to explain things. Let’s say you have 2 options: a rent-only contract that you pay $1,200 a month for OR a rent-to-buy contract that you pay $1,500 a month for. In the latter situation, the extra $300 a month should go towards the purchase credit. So, let’s say you take that contract for 36 months. Then, you’d be paying $300/month x 36 months = $10,800 towards your purchase credit. But none of that is a fixed rule, since every rent-to-own agreement is different. That means in some rent-to-own agreements all of your rent could go towards the purchase credit! But once again, we want to remind you to check the contract and know for sure what you’re getting yourself into.
Other Details That Go Into Your Rent-To-Buy Contract
Owned homes come with a set of hidden costs that we don’t consider unless we have one. In a typical house rental agreement, the tenant is expected to pay rental fees, along with any required security deposits. In that case, the landlord is expected to cover any additional costs, like maintenance, taxes, insurance..etc. Things might get tricky when it comes to rent-to-buy agreements. When signing such a contract, you should make sure the agreement clearly states who’s responsible for paying what. You should also pay attention to clauses that might affect your agreement. Such clauses may include tenant responsibilities such as keeping the place clean or mowing the loan.
So, before signing anything, clarify all terms of the agreement. You’ll need to make sure that all taxes on the house are paid up to date. It can even help to get a professional to help you with the process so you can better understand terms. It’s also advisable to get a renter’s insurance policy to cover any losses and cover for any injury liabilities that might occur while you’re living in the place.
When Push Comes To Shove
Alright, let’s assume you signed a rent-to-buy contract and your lease duration is over. Now, there are 2 options:
- You signed a lease-option contract, so you can choose whether to buy the place or not
- You signed a lease-buy contract, so you’re probably legally obliged to buy the place
If You Decide To Not Buy The Place
Under a lease-option agreement, you won’t be liable to make the purchase. However, you should note that you might lose all payments made towards potentially buying the place. Those payments will include the option fee, your purchase credit, and any other related fees. But, once again, that’s all up to the agreement you have with the landlord.
If You Decide To Go Ahead With The Purchase
Regardless of what kind of contract you got yourself into, you’re now in the process of buying a house. In most cases, you’ll need to secure a mortgage to pay the price in full. So, that’s something you should definitely look into before it’s buying time.
You should also go over the agreement you signed with your landlord one more time. This time to make sure that liabilities and expectations from both parties are fairly fulfilled.
Why Rent-To-Own Might Be For You
To understand this, you need to treat rent-to-own as a house purchase process. The process comes with all the pros and liabilities of buying your own place.
What separates rent-to-own from the typical purchase process is that it gives you the time to build up your credit score and save up money while securing your dream home. In a rent-to-own situation, you also get to experience living in the place before making the full purchase.
What You Should Do Before Signing A Rent-To-Own Agreement
As you can obviously tell, buying a house is no small decision to make. There are many factors that come into play when making such a decision. When you’re buying a house, you should look into all the benefits and responsibilities that come with it.
You Can’t Possibly Be Too Careful With The Contract
Before signing a contract that potentially could cost you a large sum of money, read it as many times as you can. Look out for any fine print. Check for the wording of each sentence, as legal terms can be really fickle. Make sure you know who’s paying for what expense. Know about all the expectations the landlord has for you as a tenant and buyer. Make sure to have a record of all expenses the landlord is expected to sort before selling you the place. A wise thing to do is to hire a real estate attorney. A set of professional eyes will provide a much clearer understanding of your contract.
It Might Be Wise To Learn More About Your Landlord
After all, this is the person you’re getting into a long-term costly agreement with. You should learn about your landlord’s credit history and what previous tenants think of them. You should probably also learn if they have any major outstanding debts. That way you can be clear on who you’re signing a contract with.
Most Importantly, Learn As Much As You Can About The House
Since you’d be signing a rent-to-own agreement, you potentially won’t be living there for a short stint. Buying a house means that you’ll be there for probably no less than 5 years, if not forever. Take your time to learn about what kind of shape the house is in.
You should also look into the area. Compare the house price with neighboring ones. Learn about the neighborhood itself, along with its access to amenities, as well as your future neighbors. You could also look into the value trend the house has been going through. This should not only tell about how much you should pay for it but also how much you can sell it for in the future. The house can also come with a set of rules, such as whether you’re permitted to keep a pet or not. Homeowners’ associations can truly affect your experience living somewhere. Such an association might also require you to pay a certain membership fee.
Confirm Your Financial Status And How Long You Intend To Stay In The House
Needless to say that you shouldn’t sign a purchase agreement for something you can’t afford. But there’s a different way of looking at it. You could look into the expenses you would put into the rent-to-buy contract and compare it with potential gains from investing the money in other things instead. If you might get more money through investments, then perhaps just renting could be better for you.
We all want a place to call our own, or at least most of us. There are obviously a lot of ways to have a place to call home. Among these options, you have the rent-to-buy option. It’s a great way to have a place for now and work on buying it in the future. You just need to be careful what you’re signing up for and take the time to identify all the pros and cons.