LEGAL DICTIONARY

Rent to Own

Rent-to-own is a method of legal purchase where the buyer of an asset initially leases it from its current owner whilst making payments to buy it outright.

In many cases, this is used to transfer ownership of real estate. Nevertheless, it can also be used as a way to purchase vehicles, appliances, and other assets if necessary.

To explain how real estate property buyers can take advantage of this process, this article casts an eye over how the rent-to-own procedure works. Discover the most important considerations to make before buying a home in this way and the biggest pros and cons of renting-to-buy.

Rent-to-Own: How Does It Work?How to Purchase a Rent-to-Own Home

Rent-to-own offers many possibilities for those who dream of buying their first home but don’t quite have the financial resources to make it a reality. However, whilst there are some similarities between buying a rent-to-own property and purchasing a home conventionally, there are some significant differences too.

There are a number of special considerations that potential rent-to-own buyers must first consider before taking any further steps.

Deciding Property Prices

Like any home sale, the buyer and the seller must agree upon a price. This will normally be calculated at just above market value. Once the price is decided it will normally be fixed under the eventual residential lease agreement, although in some circumstances it can fluctuate depending on the movement of the housing market.

Setting Option Fees

To enter into a rent-to-buy agreement it is still necessary to make a downpayment, although this is usually a smaller percentage of the real estate price than buying a home with a mortgage. This cost will usually be covered by an option fee, which allows the potential buyer to secure the possibility to buy the home by paying 1%-5% of the overall property price.

Choosing between a Lease Purchase and Lease Option Agreement

There is more than one way to manage the rent-to-own process. The type of lease agreement that you sign can have a big influence on how you eventually purchase the property. This will often mean choosing between a lease purchase or a lease option contract.

Lease purchase contracts require you to buy the property outright before the end of the agreement’s term. This obliges both the lessor and lessee to declare the intention to transfer ownership of the property upfront. They will then need to go through with the transaction following the terms of the contract.

Lease options on the other hand are much more flexible. These deals let buyers and sellers decide later in the contract whether to formally make a transfer of ownership.

Decide the Percentage of Rent

One of the most unique features of rent-to-own is that the buyer will pay the owner rent as well as payments towards the final cost of the purchase. This will normally be reflected by the buyer paying a higher monthly installment over the course of the lease agreement, which will cover the principal of the final house price.

Advantages of Rent-to-Own

Rent-to-own offers buyers many unique opportunities. It gives people looking for alternatives to purchasing a home with a mortgage the flexibility necessary to make it a possibility. The biggest advantages of rent-to-own include the following:

  • It can help people with lower credit ratings and incomes take steps towards homeownership.
  • It allows the tenant to live in the home they will eventually buy before making the full commitment to ownership.
  • There is often no need for a mortgage initially.
  • It helps people move into their own properties faster than if they had to save towards a mortgage deposit.

Disadvantages of Rent-to-Own

Whilst renting-to-own can open many doors for potential home buyers it also has some significant pitfalls that must be considered before entering into an agreement. These disadvantages include the following points:

  • Rent-to-own can be more expensive overall than simply purchasing a home with a mortgage.
  • You must continue to meet all the payments or you could be served with an eviction notice like any other tenant.
  • You could be liable for all maintenance and repairs during the tenancy.
  • A mortgage may still be necessary to buy the remaining non-owned equity in the property.
  • If you don’t decide to buy the property the payments made towards the overall cost of the home won’t be refunded.