Many creative methods of buying and selling homes are popular in today's housing market. And non more so than the rent to buy homes concept. I get several inquiries each month from first time buyers as well as experienced buyers, who are interested in the rent to own method of buying a home. Last time I talked about home loan mortgage rates.Today I'm going to explain the concept and hopefully shed some light on the pro's and cons of rent to own and lease option.
First things first; Buyers who want to use the rent to own or rent to buy concept to buy a home need to know that multiple terms or names are used in advertising homes for sale with this method of buying. and there is a common misconception that all the different terms used for the method mean the same thing. This is not true. While rent to buy, and rent to own do refer to the same basic method of doing a deal, lease option and lease purchase are 2 different animals.
Lease Option
The term lease option simply refers to a lease / contract which is written with either an option to buy clause included or a separate option to buy contract attached to the lease. In a lease option the tenant/buyer simply leases or rents the home and has an option to buy the home within a given period of time; which can be what ever the seller / landlord and the tenant / buyer agree on. Normally the option to buy is either for 1 or 2 years. The tenant / buyer will have the option to buy, or not to buy the home at the predetermined price and terms within the time frame of the option contract.
Lease Purchase
Unlike the lease option, a lease purchase is a lease with an actual predated sales contract attached. In the lease purchase the tenant / buyer is obligated to buy the home at the predetermined price and terms, and close on the date determined in the attached sales contract.
Another common misconception is that the buyers can get into a home using this creative method without a down payment. This is not usually the case. Whether the deal is a lease purchase, lease option, or rent to buy home, the buyer will be required to pay consideration for the right or option to buy the home at a future date. This is called an option consideration or deposit but usually amounts to as much as 5% of the sale price.
Yet another misconception is that all the rent paid during the term of the lease goes toward the purchase price and will be deducted from the amount due at closing. It's possible that this could be negotiated with a seller, but not likely. In most cases a seller will give some rent credit towards the sale price but usually no more than 50%. So if the tenant / buyer pays $800 per month rent, only $400 of this would be deducted from the sale price of the home when the option to buy or sales contract is excersized.
So is the rent to own home a good option for a first time buyer? It can be. However, like any other deal, whether it's rent to buy, lease option or other, it depends on what price and terms can be negotiated with the seller.
Some of the advantages of this method of buying can be.
- Typically the buyer can get into the home with no more than 6% of the sale price out of pocket cash not including non-credited rent payments.
- For buyers who have credit problems a rent to own deal may let them get into the home and rent while they repair their credit and prepare to buy the home.
- Sellers who are willing to sell on lease option or rent to own terms are often willing to owner finance. This may very well be an advantage to many first time buyers regardless of credit score depending on the terms the seller will agree to.
- Buyers may also get into a home on these terms with a lower down payment than with using conventional methods.
- Much of the rent that's paid during the lease term before the home is actually purchased will likely not go toward the purchase price. This could ad up to a lot of money over a 2 year term.
- If the seller has a mortgage, the home could go into foreclosure during the lease period. In this case the buyer could very well lose all the money that has been paid and the rent to own or lease option contract between the seller and buyer could be null and void.
- The seller may not allow the tenant / buyer to make improvements or repairs during the lease period. If the seller does allow this, the tenant / buyer could lose all the money spent on such if something goes wrong and they're not able to buy at the end of or during the lease term.
