Many Americans have a desire to own a home. This is particularly true for residents who begin feeling uncomfortable about wasting money on renting a home, paying for a space to live in without reaping any long-term benefits of investing in real estate. Thankfully, there is a way to continue renting a home while actively working toward becoming a homeowner.
Known as rent-to-own agreements, these contracts are tied to properties that are rented to tenants who have a desire to buy those homes at some point in the near future. However, not every rent-to-own agreement works the same way. Each one has stipulations that must be met before the property is signed over. Below is information that you must know about your rent-to-own options, including types of rent-to-own contracts and each party’s responsibilities during a lease negotiation.
Why Rent-to-Own Contracts Are Popular for Buyers
As a homebuyer, you may find rent-to-own contracts appealing for several reasons. For instance, you may wish to take up long-term residence in a particular area. If you do not have the means to buy a home right away, rent-to-own agreements are well-suited solutions that allow you to start making minor improvements to a property that you will eventually purchase.
Rent-to-own contracts may be appealing if you are currently not an ideal candidate for a traditional home mortgage. If you are self-employed or have an income that varies constantly, financial institutions may view you as a risky candidate. Consequently, purchasing a property in a traditional manner may feel difficult or even unattainable. For those reasons, a rent-to-own contract will seem more attainable because it will only require you to make smaller monthly payments. Moreover, it is relatively easier to find a landlord who is willing to accept your fluctuating income status.
Furthermore, signing a rent-to-own contract as a buyer is advantageous because you can negotiate the final sale price with the property owner at the time of initial signing. Another advantage is that you will not need to worry about the fluctuating real estate market when opting for this option, because you will only pay the total agreed upon once the contract is signed. Therefore, you can purchase the property at the initial agreed-upon price and hope property values increase again under your ownership. Last but not least, another positive factor is that you can often opt to not complete the purchasing portion of your rent-to-own agreement and simply move away from the property as if it was a standard rental property.
Why Rent-to-Own Contracts Are Popular for Sellers
A seller agrees to allow you to sign a rent-to-own contract on his or her property for several reasons. One possibility is that the seller is having trouble locating a buyer who is willing and able to purchase the property right away. As such, the money brought in by a tenant can help the seller pay his or her mortgage for the duration of your agreement.
In addition, buyers may prefer rent-to-own agreements for personal reasons, such as when property in question is the owner’s childhood home. Renting the home to you with an option to buy it means that you become emotionally invested in the property. If the owner sells the property outright immediately, there is no way to tell if the buyer is going to care properly for the home. Similarly, a regular rental agreement means many different renters live on the property. Overall, not all renters are likely to take proper care of the property.
A third reason it is relatively easy to find a property owner willing to provide a rent-to-own option is financial. When negotiating the contract, the homeowner can charge you a higher purchase price than the total current value of the property. The convenience of the agreement makes paying extra in the long-term reasonable to a buyer. Moreover, higher price negotiation helps the homeowner account for possible market fluctuations over the length of your contract.
Rent-to-Own Lease Negotiation Flexibility and Property Responsibilities
The flexibility for lease negotiation is a major concern when you enter into a regular rental contract. A landlord renting to you as a short-term tenant is less likely to negotiate. However, because a rent-to-own contract is long-term, negotiating is beneficial to all the parties involved. Consequently, the parties are able to negotiate the various aspects of property maintenance, upfront payment costs and other aspects of the agreement.
Despite the typical flexibility for negotiation, you must take time to consider your responsibilities related to the property. When you sign a standard rental agreement, your utilities are sometimes included. On a rent-to-own properly, you typically pay for utilities. In addition, your family is likely to have more maintenance-related responsibilities, such as lawn mowing and/or snow shoveling.
Lease Purchase and Lease Option Rent-to-Own Contracts
In most rent-to-own agreements, the rent you pay during the duration of your contract is subtracted from the final purchase cost. Then, you will pay whatever the remaining balance is when your lease contract expires.
It is important to note that upon signing a rent-to-own agreement, you are not necessarily required to purchase the property. There are two common types of rent-to-own contracts: lease-purchase and lease-option agreements. A lease-purchase contract requires you to purchase the home at the end of your rental period. If you sign such a contract, you must feel confident in your ability to produce the balance of the funds required after the lease expires.
Alternatively, a lease-option contract is a much less strict contract. It provides the option for you to choose not to purchase the property at the end of your rental contract. You may lose any funds you have invested up to this point. You may not want the property when your lease ends for several different reasons, such as: