Information on Rent-to-Own Real Estate
Sellers of real estate are anxious to sell. Would-be buyers are anxious to buy. Banks, unfortunately, are not always anxious to lend, so sellers and buyers can meeting in the middle by signing a rent-to-own agreement.
Also known as a lease option deal, renting to own has become a hot alternative to running the mortgage gauntlet. Keep in mind that good representation, a fair price and adequate time to save and repair credit offer the best chance at success.
Basics of Rent-to-Own
Before a lease option agreement is signed, plenty of negotiation takes place, beginning with the sale price. It's best to hire a local independent appraiser to examine the property, as he does not have a financial stake in the transaction. An inspection is also wise. In short, treat the deal as if it were a sale.
The parties must agree on the sale price in advance, because the renter or buyer will pay an "option fee" at the outset of the lease. This fee is negotiable and varies between 1 and 5 percent of the sale price. It guarantees the buyer the right of first refusal on the home's purchase. It's also nonrefundable if the sale never occurs.
Buyers also pay a "rent premium," meaning an above-market price that's applied toward the purchase price of the home. The amount that's credited toward the purchase is negotiated into the lease and is also not refundable if the sale doesn't occur.
Rent-to-own lease terms usually last between two and five years. The seller is responsible for maintenance, property taxes and the mortgage, if there is one.
Similar Alternative: Installment Land Contracts
Land contract deals resemble lease options except that the seller writes a mortgage for the buyer, but holds onto the deed as collateral. The price is determined in advance, and the buyer pays a 1 to 10 percent fee to the seller at the outset. The buyer makes a mortgage payment, including interest, to the seller. The buyer also pays the property taxes and maintenance, and at the end of the term, the buyer refinances with a traditional lender. Should the seller need to sell the home and the buyer be unable to refinance, the payments plus the fee are refunded to the buyer -- the seller gets this money back when he sells the property.
Advantages of Renting to Own
Renting to own allows a buyer time to save money toward a down payment while also improving credit. Buyers can decide if they like the house and the neighborhood without committing to a mortgage. They may also find that they can afford a home that they otherwise could not.
Sellers have an nice opportunity to earn above-market income on an asset that would cost money if it sat vacant and unsold. They also don't have to lower the asking price as much as someone who needs to sell and can't rent the property out.
Disadvantages of Renting to Own
The biggest problem occurs when the real estate market fluctuates considerably during the lease term. Because the price is determined in advance, should the market increase or decrease significantly afterward, there's little incentive to complete a deal. For a rent-to-own deal to work, both parties should feel pleased with the price.
Buyers face the biggest risk, because if they're unable to get a mortgage they have wasted thousands of dollars. As a result, buyers should be cautious about entering into rent-to-own agreements, specifically by not renting a home they may never be able to afford.
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