With a recent increase in demand for housing, the cost of homes is also increasing.
In numerous cities, you must have a high income and a hefty savings account to afford a home purchase.
If you are like most people, you cannot afford to pay the cost of a home upfront. As such, you must finance the home by getting a mortgage from a lender. This option requires a high credit score, which is a big indicator of your current financial standing and credit worthiness.
For those who cannot afford to buy a home right now, rent-to-own options are a great alternative. It gives them the opportunity to improve their credit score and personal finances while living in the home they would like to own.
The tenants make a commitment to eventually buy the property and make regular installments.
To learn more about rent-to-own opportunities, review the sections below.
How does rent to own work?
Instead of buying a home in cash or signing a 30-year mortgage, tenants have to option of signing rent-to-own agreements to move into the home they want without paying the full cost right away. Although the terms of this agreement can vary from one property owner to the next, there are certain conditions that are standard across all contracts of this sort.
Typically, individuals and/or families who enter into rent-to-own contracts agree to rent a property for a predetermined time and put a portion of their monthly rental payments toward the cost of the home.
How to Determine the Purchase Price
Determine the purchase price of a property is one of the most critical aspects of rent-to-own contracts. This type of agreement typically stipulates that the tenant has the obligation or option to purchase the property once the rental period is done.
With this in mind, it is important to discuss as many details as possible ahead of time. Addressing points of contention early on will help prevent disagreements later on. The purchase price is often the biggest hurdle to leap over.
In a rent-to-own agreement, there are two main ways to address the purchase price. The first entails setting and negotiating the price once the rental period is over. This typically benefits the seller, if the home values and home prices in the area increase during the rental term. In this case, the seller is able to negotiate a higher price due to market conditions.
Sellers and buyers can also agree on a sale price before the rental period begins. In many cases, the price point is higher than the current market value for the property.
However, this option is great for buyers as it ensures that the price point is set and will not change based on how the market behaves during the rental period. The disadvantage of setting a price early one is that if the home’s value decreases or does not budge, the buyer may end up overpaying for the property.
With this in mind, it is important to use the strategy that will benefit you the most. Conduct research on the current housing market and future trends, as this will give you an idea of how you should proceed.
Learn About the Advantages and Disadvantages of Rent-to-Own Properties
Entering a rent-to-own contract comes with numerous benefits, but also a few drawbacks. As such, while it may work for some, it is not an ideal solution for all homebuyers. Rent-to-own properties are good for people who want to buy a home and are confident that they will be able to do so in the near future.
Typically, they need to work on improving their credit score and build up their finances before investing in a property. With a rent-to-own property, they can begin to build equity in their soon-to-be home. This option also offers a gradual progression from renting to buying, which allows homebuyers to plan accordingly.
Rent-to-own agreements are much less flexible than traditional leasing contracts. They require the tenants to purchase the property, as agreed upon in the contract. As such, backing out at the last minute may not be possible.
However, this type of contract usually outlines an option fee, which is a non-refundable fee that assures that the buyer will have the option to purchase the property once the rental period expires. It allows the buyer to back out if they no longer wish to buy the property but they will not get the fee back.
In certain cases, buyers put a portion of the option fee toward the price of the home. This serves as an incentive to buy the home when the rental term ends. With this in mind, rent-to-own buyers must be sure that they want to buy that home. If they are unsure, they must pay the option fee to keep their options open and be protected legally.
How to Find Rent-to-Own Properties
Finding rent-to-own properties is not a simple process. It typically takes more time and research than finding regular properties. Some housing listing websites have filters that allow users to narrow down the search options to only see rent-to-own listings.
Other sites require a membership to see the rent-to-own listings. It is a good way to get an overview of properties in your area and get an idea of price points.
Another way of finding these types of properties is by approaching sellers directly. While they may not list their home as a rent-to-own property, some sellers are open to the idea.
If you are trying this method, be sure to contact sellers who have had properties up for sale for a long time. They will be more likely to accept a rent-to-own agreement. Sellers with many buyers to choose from will likely reject it if they are able to sell their home quickly.
Furthermore, if you have or forge a relationship with owners who are selling their home, you could suggest a rent-to-own agreement. They may be more willing to listen to this suggestion as it would be coming from someone they know.