Rent to own properties, while more difficult to find in a hot real estate market, present a viable option for buyers with credit challenges or low down payment funds. This approach also can benefit sellers having difficulty selling a property to realize a benefit from a rent-paying tenant while moving forward on a future sale. However, the process can be complex, and most benefit from professional assistance.
Locate a Property
Start by contacting a real estate broker, and ask if he has any listings for rent to own property, or clients who might be amenable to such an arrangement. Some sellers may not have considered this option initially, but may be open to it if their property hasn't gotten much interest in the market. Owners who need to move quickly and can't make both a mortgage payment on their new home and previous home may welcome the addition of rent money to boost their budgets.
Begin the Negotiations
Negotiating the terms of purchase in a rent to own home requires more factors to consider than a traditional rental. Agree on a purchase price, and the time frame for the purchase. Often, this is 1 to 5 years, but it can be any length of time that works for both parties. The monthly rent payment and the amount of the rent which will be applied towards the down payment and purchase price must be settled. This usually represents the rent amount above the fair market value. For example, if the market value of a rental property is $1,500 per month you may negotiate a payment of $1,800 per month. The additional $300 would apply to the eventual purchase price.
The Down Payment
In most cases, down payments are applied to the purchase price at the end of the rental term when you complete the purchase. If you are not able to complete the purchase, the seller usually will keep your down payment. The down payment also serves as a security deposit, which the seller can use if you back out of the purchase or cause damage during the rental term.
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Treat it Like a Purchase
Get a home inspection before you enter a rent to own agreement. You don't want to find out about problems with the home after you have committed. In addition, have a lawyer check for any liens or other title problems that could prevent you from getting financing on the house when purchase time comes.
A rent to own transaction is complicated, with more considerations and extra potential for problems, so consider having a lawyer draw up the contract. Ensure that all of the elements that you agree to are in the contract. This document also must spell out very clearly what happens if either party is unable to keep to the agreement, as well as who is responsible for insurance and taxes.
Renting to own your home has potential downfalls. Aside from losing any money that you have invested in the potential purchase, you may not qualify for a conventional mortgage at the end of the rental term. Also, if home prices fall during the rental term, you will be stuck with the higher purchase price you negotiated in your agreement.