Inexperienced tenants moving up to rent to own houses can make major mistakes when entering into rent to own houses contracts if they don’t do their homework. Some landlords or sellers will take advantage of these mistakes when the buyer doesn’t know better. This article points out some of the mistakes buyers want to avoid when entering a contract for rent to own houses.
Rent to Own Houses – The Basics
Rent to own houses involve two contracts. One is a standard lease contract with a mutually agreed to rent. The second contract is the option contract giving the tenant the right (but not a requirement) to purchase the house within an agreed upon time (typically, one to three years). Usually, a nonrefundable fee is paid to the seller for the option to purchase.
There are several reasons why tenants want to rent to own houses. First, purchase options appeal to people that don’t have enough savings for a down payment. The renter can negotiate with the seller to have rent credits apply towards the down payment. Additionally, the tenant has the opportunity to save more money towards the down payment during the rental period. Another third common reason people like rent to own houses is because it gives them an opportunity to improve a damaged credit score during the rental period. Fourth, it gives tenants the opportunity to become thoroughly familiar with the neighborhood before making the commitment to buy.
Rent to Own Houses – Treat These as a Purchase
One big mistake I see tenants make with rent to own houses is they treat them like a traditional lease instead if as a home purchase. When you enter into a purchase option, you should be planning to make the purchase in the end. Don’t just spend ten minutes reading through the standard lease agreement and then sign it. Perform the due diligence you would if you were purchasing the house today. Have a professional inspection done. Visit the neighborhood several times at different times of the day and week. If you have kids, check out the school system. If you use public transportation, check the local routes. Check out any neighborhood amenities that you use regularly such as gyms and parks.
If this is your first rent to own houses agreement you probably don’t know how long it will take you to save the down payment. Talk to a mortgage broker before signing the rent to own houses agreement. If you need to, you can leverage what the mortgage broker tells you into a longer option period. Same thing with your credit score. The mortgage broker should be able to tell you the exact steps you need to take and how long it will take. Or maybe you also talk to a credit counselor.
Fully understand the terms of the purchase option. How much is the option fee (about 1% of the purchase price)? Is it refundable (usually no)? Does the option fee apply towards the down payment (very negotiable)? Where some landlords become greedy here is by not applying the option fee towards the down payment and then adding a security deposit to the lease agreement. In my opinion, the option fee acts as a security deposit and should be applied towards the down payment.
Everything in rent to own houses contracts is negotiable. Make sure any contract you signed is fair to both you as the buyer and the seller.
If you want to work directly with me on the rent to own houses business model or any of the investing models that have proven highly profitable, please join me at www.wendypatton.com/what-is-wendy-pattons-inner-circle.
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Several times each week, I make the most current real estate investing information available to readers. This time, it’s about rent to own houses but the information I provide changes constantly to stay current with the market. Be sure to check back at: www.wendypatton.com. Also, get started learning how to do NO CASH lease options on real estate by picking up a copy of my bestseller book: Investing in Real Estate with Lease Options and Subject-to Deals.
By Wendy Patton
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