For many people who would like to purchase their first home, meeting the necessary financial requirements can be an insurmountable obstacle. Depending on where a buyer would like to purchase the home, he or she may be expected to put down tens or thousands of dollars as a down payment before the process can begin.
Even more, most people will then be required to sign a mortgage or seek other financial help in order to pay off the remaining cost of the property. All in all, becoming a new homeowner costs a lot.
Luckily, there are a few different financing options that potential homeowners can use to be able to afford their first property. Renting to own a property is a popular method that allows a tenant to sign a specific type of rental contract with a homeowner that eventually leads to ownership.
These contracts help renters slowly transition into property owners over a set period of years, making it easier for the renter to meet all of the financial obligations associated with the purchase. Keep reading to learn how to find rent to own property in your neighborhood.
The process of renting to own a home is significantly different from regularly renting or purchasing a property. When renting to own, tenants sign a specific type of contract that is much more detailed than a common rental agreement.
This agreement specified not only the amount the tenant is required to pay on a monthly basis and as an upfront down payment, but also information concerning the possible purchase price of the property after the rental agreement has ended and how much of the rent payments are going towards that final amount.
In most cases, people who would like to rent to own make a special contract with the homeowner that includes options for purchase at the contract’s end. Depending on the contract, this “option” can be mandatory or alterable (usually for a fee).
Because of the greater detail of these types of contracts, they generally carry higher fees and are often executed by professional agents. Tenants who have never dealt with a rent to own agreement are encouraged to find a licensed professional to draft and/or look over the contract before the final signing.
One of the most complicated aspects of coming to rent to own agreement is settling on a purchase price.
While it is not required that rent to own contracts include a definitive purchase price, many tenants and property owners prefer to layout such details at the beginning of the agreement. There are multiple pros and cons to settling on a final purchase price for the initial contract.
From the tenant’s perspective, knowing the exact purchase price of the home makes planning the actual purchase much more straightforward. With the numbers in hand, the tenant can calculate and specify in the contract exactly how much of his or her rental payments they want put towards their eventual down payment on the property.
They can also calculate how much they will need to save on top of that to meet the conditions of the agreement. In addition, both the tenant and the seller can rest assured that no matter how the real estate market fluctuates, they know how much they will make through the transaction.
Many homeowners prefer to make rent to own contracts that do not include a definitive purchase price.
By not including a total amount due for the property, the homeowner can peg the price to the current market value of the property at the time of purchase instead of at the time of the initial contract draft.
While this practice can benefit the homeowner in situations where the value of the property increases over time (as most real estate does), it can backfire if the value of the property goes down for any reason during that period of time.
In this case, the tenant can benefit from not having determined a purchase price when originally signing the contract.
By definition, renters are paying to temporarily use a space. They are making no type of investment whatsoever.
In this relationship, the homeowner renting the property should be earning at least enough to cover the cost of maintaining the property and some profit on top of that.
As a result, renting can be a clever way to pay off the cost of a property and turn at least a small profit for the homeowner. From the perspective of the property owner, renting can be seen as an investment or even a type of job.
Entering into a rent to own agreement significantly changes the relationship between tenants and homeowners. Instead of paying to use a space for a limited amount of time, renters who rent to own are investing in a property that they contractually intend to purchase.
The homeowner is entering into an agreement that will ultimately relieve them of their property (and therefore investment) for a large one-off payment. Because of the extra strings attached to these contracts, renters may be able to use renting to own to build up their credit score over time before applying for a mortgage or other financing.
As a result, there are pros and cons to renting to own for both renters and homeowners. On the positive side, renters are making an investment instead of temporarily “borrowing” space and homeowners are earning a large lump sum while lightening their workload.
On the negative side, both the tenant and the landlord are entering into a more restrictive contract. The homeowner is ultimately losing investment and money-making possibility while the renter loses his or her freedom to simply move to another home. Which option is best depends on completely on the circumstances of the renter and seller.
Rent to own contracts are not as popular as straightforward rental or purchase contracts. Tenants looking for rent to own opportunities can have to search for these types of contracts specifically or ask potential property owners specifically upon showing interest.
A common way to search for available rent to own properties is by doing an online search for listings that specify the rent to own option in the renter’s local area. In addition, some real estate agents specialize in rent to own properties and can be a big help in finding available properties in the renter’s area.
Tenants who have been in their current property for a significant period of time and who have built a relationship with the property owner may be able to change their current contract to a rent to own agreement. In this case, the renter should contact their landlord to learn about whether they would consider selling the property and at what price.
If the property owner is amenable to the idea, the renter and owner can draft a new contract that includes the necessary additional details relating to the property purchase price and waiting period.