Just wait til I get my house on you!
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?
What are the disadvantages of a rent to own?
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.