Rent to own is an alternative method of buying real estate instead of the conventional methods of taking out a loan or paying cash. In a typical rent-to-own situation, the landlord and tenant enter into an agreement where the tenant-buyer has the right to buy the property at a future date at a pre-negotiated price, and rent in the meantime, according to DaveRamsey.com.
Who is a Good Fit for a Rent-to-Own Agreement?
While rent-to-own has its advantages, it’s not the right option for everyone. Here are some of the reasons why someone might want to take the rent-to-own route:
- They are not able to qualify for a loan due to poor credit.
- They are self-employed or underemployed, and they do not have sufficient debt-to-income ratio to qualify for a conventional loan.
- are not completely sold on the neighborhood, and they want to ‘try it out’ before committing to it long-term.
What are Some of the Benefits of a Rent-to-Own Arrangement?
Community – Rent-to-own properties are often found in neighborhoods with a lower number of other rental properties. Make sure you do your own market research. That means the majority of the homes will be owner-occupied, and there is less of a revolving door of residents. Overall, these communities are usually more desirable to live in.
No obligation – Entering a rent-to-own agreement does not mean that the tenant-buyer is obligated to the buy the home. If their life situation changes they can choose to walk away from the property, and they do not have to bear the expense of selling a home, which can be significant. Typical situations can include job relocation, change in marital status, or an addition to the family.
Home improvements – There are times when a tenant might want to make changes to improvements to the home. Maybe they want to update the cabinets and the counter-tops, or they might want to give the bathroom a mini-makeover. A regular rental typically has some restrictions on what the tenant is allowed to do, but a rent-to-own arrangement will have more flexibility.
Pet-friendly – When renting to own, the tenant-buyer is more likely to be able to have pets. Many rental agreements prohibit pets, or it costs more to have them on the property.
How a Newlywed Couple was Able to Secure a Rent-to-Own Arrangement
A newlywed couple was looking at various houses for sale in Schaumburg (see here). After a quick conversation with the lender, they realized that they wouldn’t qualify for their ideal home loan at that point.
The couple contacted Property Up Chicago Illinois real estate company that had a local rent-to-own program connecting tenant-buyers with an extensive network of lenders. The lender worked with the newlyweds to address any credit issues that needed attention during the renting period. They also ensured that all of the debt-to-income ratios were sufficient to obtain a mortgage after two years of renting.
In time, Property Up provided a record of monthly rental payments for the two-year renting period to the mortgage company. The couple was able to close on the home that they rented, and become homeowners successfully.
Are There Extra Costs Associated with a Rent-to-Own Arrangement?
There are a few costs involved with a rent-to-own agreement that might be higher than a regular rental arrangement. However, it is important to compare these costs to that of buying a home, instead of comparing them to rentals. Rent-to-own arrangements come with the benefit of the no-obligation option to purchase the property, especially for people that might not be able to afford to buy a home otherwise.
Here are some of the additional costs:
- The tenant-buyer will have to put down a deposit called “consideration money”, which is typically 5 percent of the current value of the property.
- The tenant-buyer will have to pay for minor repairs, but there is usually a limit on how much they have to spend.
- The rent will be close to market price, but it can be higher than a regular rental because the property is a higher-end home in many cases.
While the rent expense can end up being close to what it would cost to own a home, it ends giving the tenant-buyer a higher chance to qualify for a mortgage at the end of the rent term.
If you think that rent to own may be the right thing for you then start by looking for a local Rent- to-Own Real Estate Agent in your area.