Table of Contents Show
- What is Rent-to-own?
- Lease Option
- Purchase Option
- How Does Rent-to-own Work?
- Advantages of Rent-to-own to Tenants/Potential Buyers
- Advantages to Owners/Sellers
- Disadvantages for Buyers and Sellers
In real estate, when someone buys a property on a rent-to-own agreement, they do so with the belief that they will eventually buy the property, rather than only leasing it at a higher rate.
The Best Buyers Agent in Brisbane has the experience to help you make an informed decision about whether or not a rent-to-own property is right for you.
However, before you agree with a rent-to-own property owner, there are several things that you need to know about this type of home buying.
What is Rent-to-own?
Rent-to-own is a type of installment plan where you rent your home for some time, and at the end of that time, you purchase the home, but without having to pay for the rental payments in full.
Typically, the rent payment schedule will appear as an additional cost to your monthly mortgage payment.
For instance, if you rent a home for $1000 per month and pay 20% down when buying it from the seller, you must make 20 monthly payments before owning it.
There are two types of rent-to-own agreements.
This is where the seller agrees to sell to you on a lease buy-out basis and, therefore, retains ownership of the home until the end of a specified period, usually 30 to 60 months after purchase
This is where you agree to purchase the property from the seller at a predetermined price at a specified time after completion of the approved period. Under this plan, you will not have to make any further payments until your home is fully paid for, as in the two above.
A rent-to-own agreement should be carefully written and contain certain essential terms and conditions so that both parties know what they are getting into.
How Does Rent-to-own Work?
The process of rent to own is quite simple. It can be done either by entering into a lease option agreement or a purchase option agreement. However, you have to pay attention to some aspects like option money, purchase price, and maintenance to avoid future problems.
To avoid potential disputes, you also need to check the rent-to-own agreement before entering it carefully. You should also make sure that this type of arrangement is written as a legal document and that both you and the seller are aware of its existence.
Advantages of Rent-to-own to Tenants/Potential Buyers
Control of the Home
Tenants have absolute control over the property during the rent-to-own period. They can modify anything they wish in their rented home, including adding or removing any fixtures. In addition, they can remodel their home and install new appliances, fixtures, and accessories.
The flexibility of the Payment Schedule
Renters have the luxury to pay rent monthly via a variety of payment plans, which gives them complete flexibility in choosing their monthly budget while also giving them flexibility when it comes to making mortgage payments every month.
In addition, a small monthly payment usually does not impact your credit score.
Rent-to-own allows tenants to save money by paying it off a bit at a time. Over time, the tenant lives in the home and builds up equity through making monthly payments to the seller. Tenants build equity because they pay for needed repairs and appear to take good care of the property.
Advantages to Owners/Sellers
Rent-to-own allows sellers to know that they will get a guaranteed sale and not have to worry about their property being vacant for an extended period of time. In addition, sellers can be assured that the home will be well taken care of during this period.
Option Money Fee
Rent-to-own sellers usually ask for a small fee to ensure that the buyer will stay with the contract to purchase the home after the option period ends. The seller can use this money as a deposit toward the buyer’s down payment.
Rent-to-own is much less risky for a seller than traditional renting. Traditional renting requires the seller to wait for a tenant who may not pay the rent on time and damage their property. It also requires the seller to handle the legalities of eviction in case of nonpayment.
Disadvantages for Buyers and Sellers
Buyers: If the tenant delays paying the rent, it could seriously impact their credit scores. The buyer then may face a difficult decision of whether or not to sell to the tenant because of this.
Sellers: Sometimes, buyers may not have the money to purchase the home when the option period ends and cancel or breach the contract. This can be a large loss of income for the seller.
Rent-to-own is a great option for tenants who wish to purchase their own home without having to pay the large down payment many other buyers must make.
It also allows sellers who are not in a position to sell with a traditional sale to get some of their money back before they have transferred the property into their name.
Finally, it is an option that both the buyer and seller can feel confident in and is an option that works well for both parties.