What Is Rent To Own? Everything You Need To Know About It

Before I dive deep into what rent to own it, I thought it's best to let the readers know what it actually is. Rent to own is basically an official agreement between the property owner (seller) and the tenant (buyer). It is also known as leasing or lease to own agreement in which both the seller and buyer agree that the potential buyer will be able to purchase the property later on once he has completed his tenant duration.

According to the agreement, the seller and buyer come up with a decided period of time, usually 1-3 years, during which the buyer will have to pay rent. After this period is over, the buyer has the option to purchase the property and claim ownership. This agreement also stops the seller from placing the property on the market during the decided time. In some cases, the tenant is obligated to buy the property, depending on what was decided at the start of the agreement.

 

How It Works

Now, we are going to take a look at how it all works. If you hope to own property based on rent to own, you are going to understand these basic concepts so that everything goes down smoothly.

      ●      Option Money

In a rent to own agreement, the most important thing that is decided between the two parties is the option money. It is the amount of money that is paid by the tenant upfront that gives him the option to purchase the whole property at the end of the agreement. Option money is usually 2.5% to 7% of the overall cost of the property.

      ●      Purchase Price

The next thing that you must understand is the purchase price of the property. It is the price that you will have to pay to the seller at the end of the agreement for the whole property. The decision of coming up with the purchase price and when to pay it usually depends upon the buyer and the seller and is determined when signing the contract. If you are trying to buy a home in an area where investment property prices are increasing, it is best to lock the purchase price rather than deciding it after your lease ends.

      ●      Rent

When both the parties are deciding the contract, it will include a section determining the amount of rent the tenant will have to pay. As it is not a traditional setting, the rent can vary according to the conditions. In a lot of cases, the buyer and sellers agree to an option called rent credit that is applied to the purchase price. For example, the contract can include a term in which a portion of the rent that the tenant pays to be credited to the purchase price. If the tenant is paying $1000 rent each month, and 10% of that goes to his purchase price in a contract expanding over three years, then the tenant will have paid $3,600 credit that will be applied to the cost of the property.

Rent credit acts as a down payment for the tenant so that he will not have to pay a huge price at the end of the contract, and it acts as compensation for the seller as he is not putting his property on the market for the period of the contract. So, it gives leeway to both the buyer and sellers and acts as a comfort point for both.

      ●      Maintenance

Last but not least, the contract may also contain a term in which it is the duty of the tenant to care for the property till the duration it expires. He will have to pay for any repairs, taxes, and insurance depending on what is decided. If you plan on buying the property at the end of the contract, the maintenance clause should not worry you as you should be doing it by right. However, if you have any questions, you should clear them before signing the contract.

Advantages to Buyers

Rent to own option gives the buyers a couple of benefits. To begin with, it allows them to save up for the property while living in it so that they have enough money at the end of the contract while paying down payments.

It also removes any competition from the market as the seller won't be able to place the property on the market till the end of the contract. So, you can't rest assured that the price of the property is not going to go up, and you won't be lowballed into paying more money than you should.

Another reason why rent to own is the perfect option for buyers is because of the fact that you get total control over the property. You can make all the changes to the property you want to while living in it, which is a huge benefit.