Owning property is often seen as a landmark of adulthood, indicating prosperity and fiscal responsibility. Unfortunately, down payments, closing costs and loans are expensive and not everyone can afford the fees associated with home ownership. However, some properties can be affordable when acquired through rent-to-own agreements. Also referred to as lease purchases, these agreements let renters gradually contribute toward down payments while occupying leased homes. A financial advisor can help protect your interests in these transactions while helping you build a long-term financial plan.
What Are Rent-to-Own Contracts?
Rent-to-own contracts mimic car lease structures, allowing buyers lacking the monetary resources to secure their future purchases with little money down. In rent-to-own agreements, sellers charge renters monthly payments that include both regular rent and additional charges for down payments.
Buyers pay excess fees until they have paid 20 percent of the sale price, or another agreed-upon percentage, at which point buyers apply for their own mortgages. Agreements typically range from one to five years.
Sellers’ Advantages in a Rent-to-Own Contract
Motivated sellers also benefit from offering rent-to-own contracts. Consider the following sellers’ advantages of lease options before deciding whether to move forward with a rent-to-own agreement of your own.
1. Steady Revenue
When monthly dues fund eventual procurements, renters are strongly motivated to pay on time. Sellers can require non-refundable upfront down payments in exchange for consenting to rent-to-own agreements. Although usually less than standard home purchase down payments (which typically cost around 20 percent of sale prices), rent-to-own deposits help provide security and immediate income. Renters planning on purchasing leased homes are also likely to maintain and upgrade residences. Even if contracts fall through, sellers often evade many damage risks associated with irresponsible or resentful tenants.
2. No Transaction Fees
Sellers incur costs during a sale, which can reduce profits. Most rent-to-own transactions act independently until it comes time to purchase. Similarly to for-sale-by-owner, sellers entering rent-to-own contracts can avoid listing agent fees. Sellers subsequently retain larger profits on their home sales for future home purchases or investments. There are lease-purchase listing websites offering inexpensive niche advertising.
3. Built-In Renter
Sellers are sometimes forced to buy new homes before they sell their current residences, often due to job relocation. In the worst-case scenario, sellers are responsible for two mortgages simultaneously until their home finally sells.
Lease-purchase contracts are designed to solidify purchase agreements early so even buyers unable to afford to buy outright have opportunities to claim homes. Sellers benefit since the pool of potential buyers is much wider than that of a traditional transaction. They can market to prepared buyers and hopeful renters at the same time.
Benefits for a Buyer in a Rent-to-Own Contract
There are obvious benefits for buyers when taking part in a rent-to-own contract, but there are plenty of reasons why a seller could find the right buyer for these deals. However, here are the biggest benefits to the buyer in these types of transactions.
1. Lower Downpayment
Some buyers may not be able to afford to buy a house because of the large downpayment required. Entering into a rent-to-own contract can help the buyer get access to buying a house without having to worry about the huge financial commitment upfront. There will still likely be a larger financial commitment than renting but it won’t generally be as large as buying outright.
2. Helps Nonqualified Buyers
Many buyers can’t get a mortgage for a variety of reasons. Whether it’s a hit on their credit because of a bad business deal or they just don’t have enough credit history, they won’t have to worry about immediately qualifying for a loan in order to buy a house. This helps someone get in a better position than renting a house while not having to worry about qualifying. It should be noted that it doesn’t mean the seller won’t do a credit check, they can just be more lenient if they choose.
The Bottom Line
Like any real estate transaction, rent-to-own deals present risks. In strong markets with increasing home prices, sellers may unfortunately lock down sale prices potentially before homes reach peak values. Rent-to-own contracts hold equal importance to traditional lease agreements and should include leasing dates, rental dues and down payment percentages. It can be a great way for a seller to lock in a sales price for a property while collecting rental income and it can be a great way for a buyer to get into a home without a hefty downpayment.
Tips for Real Estate Buying
- Any transaction involving real estate tends to be pretty large and it can have a huge impact on your finances. Consider working with a financial advisor to best protect your interests and assets when considering any such deal. Finding the right financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Before buying any real estate property, or putting one up for a rent-to-own transaction, consider what property taxes you may owe in the coming years. You can use SmartAsset’s free property tax calculator to help you estimate.
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