First, it is important to mention that there are several different terms used to describe rent to own.
The most common terms used are:
- Rent to own homes
- Lease to own homes
- Lease option
Basically, you are renting the home with a traditional lease AND you sign an option agreement.
The option agreement states a purchase price that you and the landlord/seller agree on. You have the option to purchase the home for this amount during your option period.
This agreement also details the period of time the seller is willing to give you to purchase the house. This length of time is called the option period and it’s often 12-24 months… but can be 5 years or more.
You must qualify for a real estate mortgage and purchase the home before your option period expires.
This is one of the most important agreements contained in the rent to own contracts.
Click Here for more information about the rent to own contracts.
What if I Fail to Qualify in Time?
If you are unable to purchase the home during the option period, one of two things usually occur:
- The contract expires and you will no longer have the legal right to purchase the property. Further, you forfeit all rent credits and the option fee paid to the seller.
- The option agreement may offer you the ability to extend the agreement. If this extension is offered, it typically requires a small fee and/or criteria you must meet. For example, a seller may require that you are currently qualified for a mortgage and in the “closing process” to qualify for the extension.
The Option Fee
With a lease to own you pay a non-refundable fee upfront.
This fee is called an option consideration fee, or option fee for short.
The amount is usually 3-7% of the purchase price, but this is completely negotiable. Now that the market is so weak for sellers, paying an option of 3% or less is more common.
This fee should be credited 100% to the purchase price of the home. Don’t forget to verify that the purchase price is discounted on the rent to own contracts.
The Rent Credits
Rent credits are common with a lease to own house.
It is the portion of rent that’s credited to the purchase price each month the rent is paid on time. Do not expect to be given a credit if you pay your rent late!
The credit amount varies depending on how negotiable the seller is. When you are moving into your house, make sure the amount of the rent credits are stated in the option agreement.
The 4 Critical Steps You Must Take to Succeed
Using a rent to own is an extremely powerful strategy that anyone can use to buy a home, regardless of your current credit score.
And yet, many are searching for their dream home while completely unprepared. They don’t have the critical steps and information necessary to successfully buy their rent to own home.
When you are serious about buying with a rent to own home, here are the 4 things you must get right:
1. Create Your Buyer Profile
2. Identify and Remove Errors
3. Speak to a Pro(FREE)
4. Searching Homes/Talking to Sellers
@Dbosley – This is a common response from a seller who is willing to offer their home for rent or rent to own. In this case DO NOT offer to pay extra money each month toward the down payment. Just save this extra money yourself because if you can’t buy or decide not to but, you will still have your money!
The important number to ask the seller about would be the selling price. Is the price they are willing to sell for close to fair market value? If not, move on!
I recently looked at a rent to own property. It was listed as just to rent or also for rent to own. The gentleman that I spoke with said it is $1050 for rent. I asked him how much goes towards the own part and he told me the base rent is $1050 and anything additional goes towards the down payment of the home. He is basically my saving account for my down payment. If I gave him $1350 a month he would put $300 towards the down payment. This does not seem right to me. I always thought it was a percentage of the rent price not just me giving them more money. Is this legal?
When someone finds a home with the option to rent to own, does that person absolutely have to obtain a mortgage? Our credit is not that great since my husband was a victim of identity theft a few yrs. back. We still have problems just renting. I had no problems until we were married because his identity was stolen before we met! I am at my wits end & don’t know what to do. We have been in circles with the credit agencies & they know everything, including the 2 men that stole his identity & went to prison for this crime. Still he lost his very successful business & all his great credit. We have already been scammed by a property owner at a condo complex in which the property manager offered a nice, clean, beautiful condo that was in a “certified” crime free area. The place was a real dump! It is certainly not livable or crime free! We have been there 1 month & our new SUV was stolen right out of our back lot which is in a gated community, however the gates stay open! We are still paying rent but not living there. It is so noisy because it is right on one of the busiest streets in the city! The idea was to possibly rent to own this condo, now we are suing just to get out. My husband & I are both disabled & together bring home a little more than 1800 a month. I just do not think we would ever be able to get a mortgage. I have never been late on rent, served with any type of papers like eviction, or ever had a complaint against us. It is just the opposite with us, we pay @ least a month ahead & we are clean, quiet & very likable people. Our parents are aging & want to help however they can. They know of all that has happened & wanted to build us a house (with us paying for it of course, the only thing is they want to build it on their land which will be sold when they pass away, I thought that this would just be a waste of money & time. Any advice on what to do? What if this had happened to you? What would you do as far as buying a home. My in-laws have even offered to help get the mortgage to help, but what would happen if they did so & then passed away? Would we lose that home as well? What if they co-signed for us or for me alone? Any advice would be greatly appreciated.
When i started renting 6 yrs ago my landlord said it was rent to own. As of today he wont talk about it. How do you go about finding out if you can buy it or not? I thought after so long you should have a chance to buy.
Hi Bob -
It depends on many factors that you specify on the note.
Hey,
I own a house that is worth about $230,000. I currently have it rented for $1300 per month. Recently, my renter asked if I would be open to a rent to own agreement.
What would be your suggestion on how to set this up and what the monthly payment should be? I really had not considered do this, so I was caught off guard.
I am not desperate to sell and the house is located in an area where values are expected to begin climbing again.
Your suggestions would be appreciated,
Bob
Great information on here!!! Thank you!
Zoe,
I wouldn’t recommend paying more money each month to pay down your purchase price until you actually own the home. This way you aren’t putting out any extra money each month that you could possibly lose if you fail to qualify for a loan. When you ask why are rent to own homes “double,” I’m not sure if you are referring to the rental amount or the sales price. But, you should be negotiating or avoiding homes that are on the market for double their market value.
HI Cole, me and my partner are looking at a rent to own property as our credit is less than perfect. My querrie is can you make extra payments toward the purchase price on top of the rent? And why are rent to own properties doudle the regular rental price if none of it actually goes toward purchasing the property?
Lots of good info. I have a home on the market. No offers in the past 9 months. Prices reasonable. We had it rented but there were always complaining about something. Got an offer for rent to own. Tried this with the othe tenants but we only got $650 for the deposit. What is a good time period and good Option amount to ask for? We have it listed at $69k and we had it rented for $650 last time(which is good). Any help would be appreciated!
I have very good credit. Home loan is not a problem for me. My problem of buying a home is that I don’t know how long I’ll stay in this city at the moment. I do like to buy a home right here though. So do you think rent-to-own home is a good option for me, because I COULD walk away if I have to move in the next year or two. Am I right? Thanks!
Andy,
You are correct, the option fee is deducted from the asking price of the house and is non-refundable(unless agreements state otherwise). Usually this is a good option for a homeowner who is offering their home for rent because they can’t sell. From your remarks it seems renting is not an option for you, so using a rent to own probably wouldn’t be either.
Thanks and good luck!
the option fee is it deducted form the asking price of the house and is it then the sellers to keep(spend). Is it the sellers resonpsibility to save the option fee as well as the rent credits until agreed term is up. I have been approached to rent to own my home but need the money to purchase another maybe this is not the option for me, but my house has been in the market for awhile and this is the only offer i have recieved, not sure what I should do want to get out of this house it is to small for family now but dont want to rent and lose money that way, I quess no brainer just lookin for another view.
Ryan, I’m not sure if you are referring to a particular section of rent to own “homes/condos” in your area or in general. But, a “traditional” home offered as a rent to own is exactly the same as a rental home. Owners are using this strategy much more often today because the market is slow.
You see, the majority of owners who need to sell their home are looking at a very long “holding” period if they want to sell at a retail price. I just read an article HERE that claims the national average for days on the market is 258! Many owners can’t afford these holding costs while waiting for a retail buyer so they will offer the home for rent. Homeowners who understand the concept of rent to own will market their house this way and usually get a much higher response. Because this offer is basically saying, we want to sell the house when we can, but we will allow someone to lease the place until they are able to qualify for a mortgage to buy it.
Cole, correct me if I’m wrong, but are these homes/condo’s primative units with no Fridge, Stove etc? No working utilities initially? Also, if the location is within a community/building, what about the Association fee’s??
Melissa,
A rent to own can be setup just like a traditional rental home. When the market was strong sellers could attract families with bad credit to “rent to own” with huge amounts of money upfront in option fees. In today’s market, a family that wishes to buy a home but they need 2-3 years to rebuild their credit can likely find a house listed for rent and convince the owners to give them an option to buy the home for close to nothing. I wouldn’t say that is normal but if buyers take the time to learn the steps involved with rent to own then a great deal is very possible.
Remember, you have the OPTION to buy, so if you are unable to qualify for some reason or want to back out you are not obligated to buy.
My husband and I are in the process of searching for a rent/lease to own property. We already know our credit isn’t in the shape it needs to be to outright buy a home, so we felt this would be our best option but now I’m not so sure. Any information you have would help us greatly.