If you’re looking to buy a home but have financial concerns or hesitations about bank loans, choosing the rent-to-own path is a great option, as opposed to the traditional mortgage path. This guide breaks down how the process works, the pros and cons, what to look out for in the contract, and how to find rent to own homes. Let’s dive in so you can decide if this option is right for you.
What Is a Rent-to-Own Home?
A rent to own home is a type of real estate investment when a tenant purchases the property they’re renting after a specific time. In this kind of deal, part of what the tenant pays in rent goes towards building equity in the home, or the owner credits it toward the purchase price. The terms of the rent-to-own contract outline the purchase price, the option period (when the tenant can exercise the option to buy), rent premiums, financing terms, and option fees.
There are two ways a rent-to-own agreement can work for investors:
- Investors looking to buy: The rent-to-own option allows you to lease a property with the intention of purchasing it in the future, saving you money, or working toward enhancing your credit score.
- Investors looking to sell: This lets you offload a property while covering costs. If you have a current tenant, you can opt to have them purchase the property while continuing to build equity. This is also useful with an incoming tenant interested in a rent-to-own option.
Steps to Buying a Rent-to-Own Home
There are many ways to find a rental when considering how to find rent to own homes. However, purchasing one requires a different approach. Once you’ve decided this is how you want to make a real estate investment, the next step is to familiarize yourself with how this works. Let’s take a look at the essential steps in buying a rent-to-own home:
Step 1: Decide if Rent-to-Own Is Right for You
When considering your investment strategy, it comes down to what works for your finances. Rent-to-own presents certain advantages over traditional renting, but like most things, it also has drawbacks. Consider these pros and cons when making your decision.
Buying Rent-to-Own
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Selling Rent-to-Own
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Step 2: Assess Your Needs
Before jumping into rent to own properties, the next step is assessing your needs for this type of investment. Doing this helps save you time and allows you to zone in on particular locations and property types. Consider the following points:
Step 3: Choose a Location
So, if you’re wondering, “How do I find rent to own homes?” your next step is to explore your location options. To start searching on your own before working with a real estate agent, browse real estate listing sites to get a feel for what’s out there and what you like. Here are some sites that help you find homes rent to own:
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Step 4: Conduct a Market Analysis
To gain insights into a property’s income potential and be able to negotiate the purchase price, perform a comparative market analysis (CMA). This data will help you determine whether a property will likely generate positive or negative cash flow, which is crucial information for making real estate investment decisions. Key insights the analysis will give you include:
| Buyer CMA | Seller CMA |
|---|---|
| Recent sales: Gives you an idea of what the property is worth and how much rent typically goes for in the area | Recent sales: Helps you narrow down fair market value for your property to determine a purchase price |
| Market trends: Helps you understand what you may be able to sell the property for in the future | Time on market: Understanding the average time a property is listed for sale will set realistic expectations |
| Neighborhood and amenity info: Supports the price for rent and future sale and gives you insight into whether or not this is a good investment | Current properties on the market: Gives you insight into the competition and whether or not other sellers are willing to sell rent to own |
Whether buying or selling a property, conducting a CMA will give you the information you need to make a good investment. No matter your reason for choosing rent to own, you should do everything you can to understand whether there will be a return on your investment.
Step 5: Negotiate Terms
Negotiating the terms of your agreement is a crucial part of how you can rent to own a home. These agreements should clearly specify how and when the home’s purchase price will be determined and the type of agreement being made. There are two main ways to establish the purchase price before signing the lease:
- You can agree on a fixed purchase price at the beginning of the contract, which may be higher than the current market value
- Or, you decide on the price at the end of the lease term based on the market value at that time
Pro Tip: Establishing a fixed purchase price can be beneficial in markets where home prices fluctuate or are rising, allowing you to anticipate potential future appreciation.
In the two types of rent-to-own agreements, it’s possible to lease a home for one to three years, with the option to buy at the end of the term. The different agreements you can make are:
- Lease option: You have the flexibility to opt out of purchasing the home after the lease ends.
- Lease purchase: Both the buyer and homeowner must commit to proceeding with the sale at the end of the lease term.
Carefully review the terms and conditions explaining the differences between a lease option and a lease purchase. Be cautious with a lease purchase since it commits you to eventually buying the property, which could lead to financial strain if the purchase time comes before you’re truly ready.
Step 6: Review & Sign the Rent-to-Own Agreement
Before signing the contract, look at the terms and conditions in the lease option or lease purchase agreement. Pay close attention to important stuff like how long the rental period is, the option fee, how much you’ll pay each month, and any responsibilities for repairs and maintenance. Being informed from the get-go can help avoid problems for you and the landlord/seller later on. Here are some key things to think about before you put pen to paper:
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Examine the contract details:
Review deadlines, option fees, rent payments, purchase price determination, exercising the option to buy, pet policies, maintenance responsibilities, homeowner association dues, property taxes, and additional maintenance requirements.
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Consult a real estate attorney:
Seek advice from a real estate attorney to understand your rights and responsibilities as an investor. Consider negotiating particular clauses before signing; consider alternatives if the agreement doesn’t favor you.
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Research the property:
Conduct thorough research on the property before committing. Order an independent appraisal, perform a property inspection, verify up-to-date property taxes, and check for any liens. These steps inform your decision on whether the property is worth investing in.
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Investigate the seller’s background:
Obtain a title report to confirm taxes are up-to-date, property ownership, and equity.
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Ask questions promptly:
Understand the circumstances that would make you lose the option to purchase. Certain contracts may revoke this right for late rental payments or failure to provide a written notice of your intention to buy.
Step 7: Pay the Option Fee to the Seller
Once you’ve signed the contract, the next step on how to rent to own a house is to pay the option fee. This fee is paid upfront to the seller and is nonrefundable. It’s negotiable but typically ranges from 2% to 7% of the home’s purchase price. Paying this option fee gives you the exclusive right to buy the property in the future.
Important Note: The option fee is not refunded if the purchase isn’t completed. However, when you do move forward with the purchase, it’s commonly credited toward the final purchase price of the property.
Step 8: Fulfill the Monthly Rental Payments
Once your lease starts, you’ll begin making the monthly rent payments. Usually, part of that payment goes toward saving up for the future down payment on the house. Because of this, rent-to-own payments are generally higher than the current market rate since they include contributions towards potentially buying the home later on.
Online payment portals are beneficial for both landlords and tenants. A platform like PayRent makes it easier if you’re a landlord to manage communication with the tenants. Or if you’re a tenant, to stay on top of your rent payments conveniently. This streamlines the process and helps both parties maintain important documents and records, which can be useful when finalizing the rent-to-own purchase agreement.
Step 9: Initiate the Mortgage Application Process
When the rental period ends, you can either go for a mortgage to buy the property or decide not to buy it. Funding has to be secured by the end of your lease purchase agreement to keep your exclusive rights to the home and any rent credit you’ve built up. If you choose to purchase the home, you’ll start the standard mortgage application process to get financing.
Just a heads up—if you sign a lease purchase agreement, you’re legally required to follow through with buying the home, or you’ll lose your option fee and any additional contributions made toward a down payment. Also, the homeowner can take legal action for breaking the contract.
Frequently Asked Questions (FAQs)
What’s the difference between rent-to-own and mortgage?
Rent-to-own is a process where you rent a property for a certain period with the option to purchase it at the end of the lease agreement. On the other hand, a mortgage is a loan you take out to finance the purchase of a property. With a mortgage, you own the property from the outset and pay off the loan over time, while with rent-to-own, you are essentially leasing the property with the option to buy it in the future.
What is the main reason to avoid renting to own?
Renting to own isn’t for everyone due to the terms of the agreement. You’ll pay a down payment during your tenancy toward purchasing the home. If you don’t purchase at the end of the lease, you risk losing the option fee and the money you already contributed. The monthly payments are often higher than market rates due to the eventual purchase, so this may not be the best route if you’re looking to save money. If you think you may need more time than the lease allows to qualify for a mortgage, locking into this agreement won’t work.
Is it always better to own or rent?
There is no one-size-fits-all answer to whether owning or renting a home is better. It depends on your financial situation, lifestyle, and personal preferences. Owning a home provides more stability and the potential for long-term financial benefits, but it also comes with more responsibilities and expenses. Renting offers more flexibility and lower upfront costs, but it may not give the same sense of ownership and may not be a good long-term investment. Ultimately, your decision should be based on your circumstances and goals.
Bringing It All Together
Many people want to invest in real estate, but getting started can be challenging. Rent-to-own homes offer an effective way to secure a home without the complications of a traditional mortgage, allowing you to jumpstart your investment portfolio. Use our guide to learn how to get rent to own homes and determine if this strategy is right for you.
We encourage you to share your thoughts in the comments—whether you are considering a rent-to-own option or have already taken this route.
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