When the term “rent to own” comes up it can confuse people more familiar with the term “lease option purchase”. The confusion comes from the fact that there are so many different ways to write these contracts. The bottom line is both terms essentially mean the same thing. The one exception might be when people use rent to own to imply that a lease purchase fee is not involved. However, both terms can be used interchangeably as long as you understand that there is great flexibility in how individual contracts are written.
Rent to Own is a Great Option for First Time Buyers
In a typical rent to own scenario, tenants rent for a set period of time, often for a year (but the time line can vary). When the agreed to period of time is up, the tenants have the option to purchase the home. This works best when a portion of the rent is credited towards the sales prices and/or closing costs. For that reason, the tenants often pay an above market rate of rent during the option period.
Another common arrangement is when the tenants pay an upfront purchase option fee. The amount of the fee varies but is typically between one and three percent of the agreed to purchase price. Call it a rent to own or a lease purchase agreement, but the seller can’t sell the home to anyone else during this period. However, the tenant is not required to purchase the house if he or she is willing to forfeit the nonrefundable fee and higher than market rate rent.
Why Rent to Own is Popular
The rent to own plan appeals to people with little or no savings for a down payment, people with damaged credit, or no credit, or otherwise can’t currently qualify for a mortgage. These can include people that have a foreclosure or short sale on their credit history. The waiting period before they can again qualify for a Fannie Mae or Freddy Mac mortgage has been shortened and many are only months or a year from being able to obtain the needed mortgage. These are people that a rent to own arrangement makes sense for. Applying part of the rent towards to purchase enables them to own a home in a shorter period of time.
Rent to own is also a good way for young parents to move their family into a desirable neighborhood with a good school system and a low crime rate. It’s a way to get into a good house today to test drive the neighborhood without committing to a 30-year mortgage.
Rent to own Pitfalls to Avoid
It’s a good idea to for the rent to own buyer to have the property title researched to be sure the seller can deliver a clean title. Nothing but animosity will result if the buyer goes to close the deal a year down the road only to find the seller has a tax lien or mechanics lien on the home that has to be paid before the deal can close. At that point, the rent to own buyer has significant financial and sentimental interests in the home.
Buyers typically have the home inspected prior to closing the deal. The rent to own buyer would be wise to have this inspection done before entering into the rent to own agreement.
Because rent to own agreements can be very flexible, there are options if the buyer doesn’t want to pay these fees upfront. The purchase option fee and portion of the rent applying to the purchase price can be paid into an escrow account and be refundable if title or inspection problems arise at the time of the final sale. The point being is that rent to own can be a win-win for both the buyer and the seller.
If you want to work directly with me on the rent to own business model or any of the other investing models that have proven highly profitable, please join me at www.wendypatton.com/what-is-wendy-pattons-inner-circle.
Besides reading this article about the rent to own business model, you’ll want to read this other useful information that I offer free. Please take advantage of it today.
Several times each week, I make the most current real estate investing information available to readers. This time, it’s about the rent to own business model 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
What did you think of this article? Please leave a comment below.