What Are Rent-to-Own Units?

In the US real estate market, the rent-to-own method has been used since the 1950s, according to FundingUniverse.com. There are two ways in which a rent-to-own agreement can take place. The first option is to offer a renter a lease agreement with an option to purchase the home at the end of the lease, or the second option is to sign a lease agreement with a purchase agreement already in place. This means that a price for the residence has already been agreed upon before the lease was signed, and both parties are committed to the sale and purchase of the property for a specified price.

Landlords and tenants considering a rent-to-own method for their next apartment or home should consider several factors. How does this all work legally? What are the benefits and the drawbacks? In each scenario, simply put, one can build equity in the place they are living, while still being a renter of that property. Additionally, the landlord is given added security that the renter will fulfill the terms of the rental agreement.

Trulia.com gives a great example of a rent-to-own situation as follows: “If the price of the home is $200,000, and the landlord agrees to apply 30% of your $1,500 monthly rent payment throughout your two-year lease agreement. This would bring the purchase price (of the home) down to $189,800.”

Some Considerations for Tenants

Are there any available units for a rent-to-own?

These listings are difficult to find, as they appeal to a specific type of renter. They are more typical in smaller buildings or with rental homes.

Do you know where the money is going?

Working with a transparent landlord is key, and understanding the specified contract and its implications is very important. Important questions to ask are: Where is the money held? Is there any option to back out? Also, having good legal advice is key here. Additionally, it is important to note that if the home cannot be purchased or financed, the upfront deposit and rent credits toward the purchase will be forfeited.

What are the credit implications for the renter?

According to HomeGuides.com, tenants with imperfect credit scores are typically drawn to rent-to-own properties. This is great for potential homeowners. “If you have credit repair work that needs to be completed, or if your financing is still a question mark, push for a closing date at least 12 months in the future.”

Considerations for landlords:

Is your legal agreement for this ready to go?

Landlords will need to draft up a new agreement, be aware of how the rental credits are issued and held. Legal ramifications are important on both sides.

How does a landlord handle maintenance and repairs?

In a typical rental agreement, all repairs are the landlord’s responsibility. This may not always be the case and is up to the discretion of the individual landlord.

Are there financial benefits to the landlord?

Typically, in a rent-to-own scenario, the renter is more secure and is more likely to fulfill the contract, thereby reducing the risk of evictions and break-lease scenarios.

With the rental market and the home market soaring in today’s market, the rent-to-own option may be worth exploring. The key is to be informed, study the agreements, and make sure both parties are aware of the outcomes.

Sources:

https://www.trulia.com/guides/how-does-rent-to-own-work/

http://homeguides.sfgate.com/rent-to-own-works-3053.html

http://www.fundinguniverse.com/company-histories/rent-a-center-inc-history/

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