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Why Sellers Should Offer Rent-to-Own Contracts

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.

Find out now: Is it better to buy or rent?

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.

Motivated sellers also benefit from offering rent-to-own contracts. Consider the following sellers’ advantages of lease options.

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.

No Transaction Fees

Sellers incur costs during a sale, which reduces 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, such as iRentToOwn.com, which permits users to list their homes for an entire year, or until buyers purchase homes.

Minimal Vacancies

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 homes finally sell. 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.

Find out now: How much house can I afford?

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. Homes for sale in Orlando, for example, hold a median value of $133,400, which is an astounding 11.8 percent increase from September 2013. Moreover, Zillow forecasts home values to rise another 3 percent in 2015. So, sellers listing their homes for sale now might miss out on potential list price escalation in the near future. At the same time, homes for rent in Orlando are also up 4.2 percent year-over-year, with a median rent of $1,305. Sellers can leverage increasing home values and current rent costs to price their units high, corresponding with competitive markets and helping increase profitability.

Rent-to-own contracts hold equal importance to traditional lease agreements, and should include leasing dates, rental dues and down payment percentages. Both buyer and seller designate responsible parties for taxes, insurance, utilities, maintenance and repairs during tenancies, varying per agreement.

Photo Credit: flickr

Jennifer Riner of Zillow
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