The general idea behind the Rent-to-Own program really is in the name. You basically rent a place until you buy it one day. So, the way it works is through a rental lease that gives you the option to buy the house eventually. Typically, these lease agreements specify that the tenant buys the house by the end of the lease agreement. The agreement will often involve two parts:
- A standard lease agreement
- An option to buy
To make that ‘option to buy’ possible, landlords will often charge an option fee. Option fees don’t have a set price or percentage of the house value. So, the amount paid as an option fee will be for the discussion between you and the landlord. However, typically, the option fee is somewhere between 1-5% of the purchase price. The idea behind that option fee is to provide the buying option for that house while guaranteeing that the landlord doesn’t lose money in case the deal falls through. It’s important to remember that every agreement will vary so you will want to get a professional to help you understand the documentation.
Types Of Rent-To-Buy Agreements
When it comes to renting a place until you buy it, there can be two different types of agreements. You should really pay attention to the kind of agreement you’re getting involved in, as they carry different legal obligations.
Lease-Option contracts: These contracts show that the tenant is interested in buying the house by the end of the lease term. However, at the end of the lease term, the tenant can opt to not buy the house. At that point, the ‘option’ to buy just expires with no further consequences.
Lease-Buy contracts: These contracts indicate that the tenant “will buy” the house when the lease term is over. So, if you sign a Lease-Buy contract you might be forced to buy the house by the end of your lease, even if you can’t afford it.
Why Would I Want To Sign A Rent-To-Buy Agreement?
Houses are very expensive. Many homebuyers may not have enough money to buy a house right away. Even if these buyers opt for a mortgage, they might not have a high enough credit score to qualify for such a loan. At the same time, rent-to-own leases give these tenants the opportunity to try living in the house long-term, so they can be sure of their purchase decision and work on their own personal situation. This includes improving their credit, saving up a down payment, or even increasing their income.
How Do Landlords Decide On The House Sale Price?
The tenant and the landlord will often discuss the house sale price at the start of the lease agreement. In some situations, the 2 parties will agree on the sale price at the start of the lease. In other cases, they may agree to decide on it when the lease term is over. Typically, in the former situation, landlords will ask for a price that is higher than the house’s current market price. That makes total sense considering inflation and market changes.
Does Any Of The Rent I Pay Go Towards Buying The House Eventually?
Every rent-to-buy agreement can be different from the other. However, in many instances, landlords will ask for higher rent within a rent-to-own lease agreement. For example, if you’re only going to rent the house, without the intention of buying, your landlord might ask you for $1,500 per month. However, if you’re signing a rent-to-own lease agreement, your landlord might charge you $2,000 per month. That extra $500 will probably go towards your eventual purchase amount. So, let’s say you’re renting the house for 3 years, so that’s 36 months x $500 = $18,000 that would go towards the purchase amount. But again, it varies by agreement.
Rent-to-own agreements work a lot like rent-only agreements but typically come with extra costs, also with a commitment to potentially buy the house at the end of the lease term. It’s important to know what kind of lease agreement you’re signing to avoid putting yourself in a situation where you have to buy a house you’re no longer interested in buying.