Rent To Own

 

As I drive around in my market I tend to see homemade signs posted at major intersections with houses advertised as “Rent to Own”. In this post I’d like to layout a typical rent to own deal as well as show how the unscrupulous can take advantage of an unsuspecting buyer.

 

First terminology; rent to own is the same as a lease purchase. It is a combination of a lease and an option to buy a house for a certain price. This type of deal attracts people who are not quite ready to buy but are willing to bet that they will be able to purchase in a relatively short period of time. Most of the time the attracted buyers are either just getting started or are starting over after a bankruptcy or other credit issue.

 

 

Here are the main features of the deal:

 

     

  1. Buyer and Seller agree to an option price and the time for which the option is good (usually 3 years or less but is negotiable).
  2.  

  3. Buyer pays an non-refundable option fee upfront to Seller (usually 1% – 5% of purchase price) . If they exercise the option the option fee goes toward the purchase price of the house.
  4.  

  5. Buyer agrees to pay monthly rent to the Seller. Usually, the buyer pays a premium on the market rate rent and that premium also pays down the option price of the house.

 

Advantages for Seller:

 

     

  1. Expands the pool of possible buyers to their house. This is especially helpful in a slow market.
  2.  

  3. Option money is upfront and payable to the Seller.
  4.  

  5. They can usually collect above market rate rent.

 

Advantages for the Buyer:

 

     

  1. They are able to lock in a sales price on a house.
  2.  

  3. They are able to pay down equity each month they pay rent.
  4.  

  5. They are given time to accumulate a down payment or repair credit.

 

Buyer Beware:

 

There are situations where the Seller is just looking for a victim. There have been many instances where sellers are just looking for the upfront money and premium rent and then find a technicality to evict the buyer/renter before the option can be exercised.

Print Friendly