How Does a Rent to Purchase Work?
A rent to purchase, or rent to own, agreement means that a tenant rents a house from an owner with the intention of buying the house at the end of the lease term. There are a number of advantages and disadvantages for both parties. It is a stepping stone between renting and buying a house.
General Process
In a rent to purchase situation, you sign an agreement that looks much like a lease agreement, but has additional clauses that indicate that you have the right to buy the house during or at the end of the lease term. The owner cannot sell it to anyone else without your permission during the lease term. Typically, you pay a down payment amount at the beginning of the lease, which is applied to the down payment amount when you buy the house. A portion of each month's rent payment is put aside and used for the down payment as well.
Details
Use a lawyer to draw up the rent to purchase agreement, and understand the agreement completely before you sign. You want to avoid any confusion as to the details of the agreement, including the initial down payment amount, monthly rental fees and monthly down payment allowance. Also, treat the home as if you are buying it normally: hire an inspector and ask the landlord to make any changes or necessary maintenance before you buy the house, or agree to make them yourself with a lower purchase price.
Advantages to Buyer
The main advantage to the buyer is that a rent to purchase agreement is like buying something on layaway from a store. You might not be ready to buy the house financially, emotionally or because of low credit scores, but at the end of the lease agreement, you are in a better position and can buy the house then. You can also "test drive" the house during the lease agreement, and are not obligated to buy it at the end of the lease if you change your mind. However, if you do not choose to buy the house, you lose the down payment you made at the beginning of the lease term. Another advantage is that you can pay the down payment amount gradually instead of all at once. You can also establish a good payment history and improve your credit score, to qualify for a better loan once the lease period is over.
Advantages to Seller
Sellers of the home can ask for a higher rent payment amount from the buyer due to the buyer incentives. The seller also gets to keep the deposit no matter what, and typically does not pay a realtor commission, since the seller usually sells the house to the buyer independently. Buyers will tend to be more ideal tenants than usual, as they feel attached to the house and want to maintain it well and make payments on time, since they will eventually own it. The seller also gets peace of mind by not having a vacant house, and can sell a house they no longer want to an interested renter.
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