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As cities continue to grow and demand for housing increases, homes are becoming more and more expensive.
In many cities, purchasing a home requires not only substantial savings but also a high yearly income. Additionally, unless buyers can purchase a home using cash, they will need to finance the home by borrowing money from a lender like a bank or a credit union, which requires having a relatively high credit score.
Rent-to-own options provide homeownership opportunities to future buyers who cannot yet afford a house. This gives them the chance to prepare to purchase the home in the future by bolstering their savings and improving their credit scores while essentially settling into the house they would like to own in the future. For these reasons, rent-to-own agreements can be beneficial for many buyers. Learn more about these opportunities by reviewing the following sections.
Rather than purchase a home by paying cash or applying for financing through a home loan, tenants involved in rent-to-own agreements move into their potential future homes without buying them right away. Although rent-to-own agreements vary, certain details are common across most contracts. Generally, tenants in rent-to-own agreements rent properties for a pre-determined amount of time, and a portion of their rent payments is put toward the home’s purchase. Property price can be decided upfront.
One of the most important parts of rent-to-own agreements is determining the purchase price of the home. Since these agreements stipulate that the tenant will have the option or obligation to purchase a home once the rental period is over, it is often beneficial for both parties to negotiate as many details as possible ahead of time. This will help prevent any disagreements once the rental period is over and the tenant wishes to purchase the property. Deciding on the purchase price, however, can be quite difficult in these situations.
There are two main options available for those determining a home’s purchase price during a rent-to-own agreement. The first involves not setting a purchase price when the rent-to-own agreement is initiated and waiting until the rental period is over before negotiating a price. This option usually benefits the seller, particularly if home prices in his or her area are set to increase dramatically over the next few years, as it can leave the seller with room to negotiate based on market conditions once the rental period is over.
The second option for determining a home’s purchase price during a rent-to-own agreement is to set a price at the beginning of the rental period. When deciding on a price at the beginning of this period, the seller and buyer will usually agree on a price that is significantly higher than the house’s current market value.
This option can be beneficial to buyers because it provides them with the security of knowing the value of their rent payments and it helps them avoid the possibility of paying more for the house if its market value increases significantly during the leasing period. However, setting a price at the beginning of the rental agreement can also cause problems if the home’s value decreases or simply does not increase enough to merit the pre-determined purchase price.
Rent-to-own agreements come with a variety of benefits and drawbacks, so while they may be the perfect solution for some buyers, they are not right for everyone. A rent-to-own agreement is a good option primarily for buyers who wish to purchase a home and are certain they will be able to do it in the near future but lack the funds or credit score to purchase one now.
The agreement allows these buyers to starting building equity on the property they plan to purchase in the future. It also gives them time to increase their credit scores or save enough money to be able to make a down payment on the home once the rental period is over.
Rent-to-own agreements are perfect for those who are certain they want to purchase a particular home and do not need the flexibility that usually comes with traditional leasing agreements, as lack of flexibility is one of the major drawbacks of rent-to-own properties. When signing a rent-to-own contract, buyers must typically agree to pay an option fee.
This is a non-refundable fee that guarantees the buyer the option to purchase the home once the leasing period is over. Although buyers who pay an option fee also have the option of backing away from the purchase once the rental period is over, they risk losing the fee. In some cases, a portion of the option fee can be applied to the price of the home, which further incentivizes the buyer to purchase the home. When agreeing to a rent-to-own contract, it is important for buyers to ensure that they have the option to purchase the home or to walk away from the purchase if they choose to.
If there is no option written into the contract, then the buyer may be legally obligated to purchase the home once the rental period is over.
Rent-to-own properties are not as easy to find as regular properties. However, some websites offer rent-to-own listings in addition to regular rental or home sale listings. Many of these websites require a membership for those seeking rent-to-own properties. Another way to find rent-to-own properties is simply to approach home sellers and inquire about the possibility of a rent-to-own agreement. If homes are selling quickly, sellers may not be receptive to this option.
However, if their homes have spent a significant amount of time on the market, then sellers may be open to negotiating a rent-to-own agreement. Additionally, if you currently rent a home and have a good relationship with the owner, you may be able to suggest a rent-to-own agreement, especially if you know the owner may be interested in selling the home in the coming years.