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Rent with Option to Buy

A Rent with Option to Buy may sound like a good deal, but is it?

It works for some people, but does it work for you?

What is a Rent with Option to Buy?

A rent with option to buy contract functions as assurance to the buyer-renter that the landlord will sell him/her the home at a future, specified date for a certain amount. Although buyers can opt out of the lease option, both parties have a tentative agreement. The buyer pays rent for the contract term and lives in the home.

How does it work?

The process works similarly to a car lease: you (the renter) pay a certain amount each month to live in the house, and at the end of a set period --  generally a year -- you have the option to buy the house. Each month of rent you pay is income for the seller, while a portion of it goes toward a down payment to eventually buy the home.

Before entering into an agreement, sellers have to decide the sale price and rent they'll charge for the house. Both amounts are subject to negotiation, just as a regular sale would be. But sellers and buyers need to remember that once they sign an agreement, the sale price of the house is locked in until the end of their rental term, between one and three years. Even if other housing prices rise or fall during that time, the original agreed-upon price is final.

Sometimes sellers will want renters to pay an option fee in addition to the rent. The option fee is a set amount that the renter pays the seller. If, at the end of the lease period, the renter buys the house, the option fee becomes part of the down payment. If the renter doesn't buy the house, the option fee becomes income for the seller. In other words you - the renter - lose this money! Rent premiums are an amount slightly above the typical rent, with a portion of that money going toward a down payment.

Here's a typical example: The house is worth $200,000, and typical rent would be $1,000 a month. Someone who's renting to own might pay $1,200 a month in rent and then receive a $200 rent credit each month. Add the option fee, in this case $5,000. On a one-year lease, the renter would earn $2400 in rent credits. Adding the earned rental credits to the option fee, the renter has accumulated $7,400 for a down payment.

This is a valuable alternative for buyers who otherwise wouldn't have the credit score or money saved to acquire their own home. And the sellers, eager to relieve themselves of the burden of the old home, earn this money whether or not the house sells once the leasing period expires. 

What if you change your mind and don't want to purchase the property?

If, at the end of the contract you can't or choose not to buy the house, the seller keeps all the money. However you will be paid the small amount of interest that has accrued on the account.

What are the advantages of a rent with option to buy?

  • You can defer making a decision for a set period of time (rent to own options can vary in time from 6 months to a year or even longer).
  • You can live in the property before you purchase and determine if it and the neighborhood are right for you.
  • You can save up money or improve your credit while living in your new soon-to-be home.
  • At the end of the year your earnest money deposit is already in place.
  • Depending on the agreement, you can walk away if you find something seriously wrong with the house. Although you will lose the option fee and all your rent credit money, that amount will be much less than if you had bought the house outright and tried to leave it later.

  What are the disadvantages of a rent to own?

  • When you write up a lease for a rent to own the purchase amount is stipulated and you have no way of knowing what the property is going to be worth at the end of the year.  (There are ways around this, you can stipulate that the property amount is at "market value" and based on the appraised value of the property at the time of purchase. The problem is getting the seller to agree to this.).
  • You still have to pay the upfront option fee. It's usually a percentage of the agreed-upon selling price of the home and is often thousands of dollars. Although this money will go to the down payment should you decide to buy the house, it can still be difficult to accumulate that much money before renting.
  • If you are just one day late on a month's rent payment, most agreements void the rent credit for that month. Think about the previous example, where the one-year renter received a $200 rent credit each month. If the buyer paid the rent late just three times each year, at the end of the lease period, the buyer would have $1,800 less for the down payment. The buyer in the rent-to-own agreement must pay on time, every time.
  • If the seller fails to pay the original mortgage on the house, it may be foreclosed and you may be forced to move.
  • All those repairs that used to be somebody else's problem in a rented apartment often become the responsibility of the new buyer, even during the rental period. Whether it means climbing on a ladder to unclog the gutters or having to pay for a new washing machine when the original washer breaks, the renter has to take care of it.
  • If you decide not to purchase you can just about guarantee that the seller will ask you to leave; extensions are extremely rare in rent to own transactions.

I hope this answers your questions about rent to own properties.  They can be great depending on your circumstances.  However for many people this situation isn't ideal and they prefer to do an outright purchase.  As always, the choice is up to you.

 

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Margeau Gilbert
Exit Right Realty
8730-16 Cherry Lane
Laurel, MD 20707
Direct: 240-462-1955
Office: 301-362-4500

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Margeau Gilbert | 240-462-1955 | Contact Me
Exit Right Realty - 8730-16 Cherry Lane - Laurel, MD 20707
Office: 301-362-4500
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