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Last updated: November 6, 2018 • Real Estate Investing

Rent to Own Properties

A long long time ago, the only way people could become homeowners was through a simple purchase. You’d pay whatever the home seller was asking upfront and you’d get the house all for you. But, thankfully those days are long gone. In today’s real estate market, home buyers have various avenues towards making the purchase. Typically, when potential home buyers are interested in purchasing a property, they will first inquire with their bank about a mortgage payment. From this point, the homeowner is able to place a down payment on a home and fully purchase it with the help of a loan from their bank. But to acquire those loans, our financial system has made several important safeguards and sometimes, unfortunately, one does not qualify for the mortgage.

What to do, then? Decline the home-owning dream over?  Of course not! Homeowners also have the option to sign a rent to own contract, which typically allows buyers more flexibility with purchasing a home than the usual home buying process.

How so? Well… through rent to own properties. In the real estate industry, properties that are under a rent to own contract are called “Rent to own properties”. Rent to own contracts come in two forms: rent with option to buy – which is basically a home (or apartment) that a tenant rents like any regular lease, but with the option (not obligation!) to buy for a fixed price after a certain period of time – and the lease purchase, which is basically the same, except, at the end of the contract, the tenant is obligated to turn into home buyer and pay for the home.

How does rent to own work with bad credit?

Signing a rent to own contract provides wishing-to-be homeowners with many benefits. Like we said, for people that are interested in buying a new home, it may be difficult to receive an approval from banks for a mortgage. In many cases, this is because the potential homeowners have a lower credit score than banks are willing to provide a mortgage to; the risk is just too high for them. Because of this, many potential owners seek alternative measures for the purchase of a home. That makes rent to own properties a great alternative in the event that a potential home buyer will not be able to obtain a mortgage.

The first step is paying the option fee – which is negotiable, but it’s usually between 2.5% to 7% of the purchase price. Paying this option money makes one eligible to, later on, acquire the house, if one wishes. After that, it’s like a regular rental. The home buyer – disguised as a lessee – signs the rent to own contract that obligates them to make partial payments towards the purchase of that home. Typically, a portion of the rental payment is used for abating the final amount. Once the regular lease is up, the home buyer pays whatever is left to exercise his option to buy the rent to own property. This process usually lasts at least one year. During this time, the interested home sellers are prohibited from advertising the house in the market and accepting any offer on the rent to own property in question. All of this information should be spelled out in the rent to own contract.

Is renting to own a home a good idea?

The best thing about rent to own properties is the fact that the buying price is stipulated at the beginning of the landlord-tenant relationship. In the case the real estate market the rent to own property is located in becomes hot, the tenant scores big bucks. Can the opposite happen and the rent to own property’s market value decrease? Sure; but the tenant has no obligation to buy it. He (or she) has the option to; that’s all.

There are times when it’s not really an “option”, though. If a renter is obligated to purchase the home by contract, they will also provide the current homeowners with a one-time purchase payment to go toward the official purchase of the home as a type of down payment.

Throughout this process, it is important for renters to be aware of their contractual obligations for any payments regarding the home. Within the rent to own contract should also be information regarding the renter’s obligations for property taxes, Homeowner’s Association (HOA) fees, and insurance. In some cases, at the end of this process, renters that are obligated to buy by contract are expected to apply for a mortgage to finance the home and move on to purchasing. Because of this, it is important for renters living in rent to own properties to continue to establish good credit so that they can be approved.

However, not everything is rosy – if it was, rent to own properties would be the most popular real estate transaction; wouldn’t you agree? The thing is that on the home seller’s part there are not a lot of guarantees. What if they receive a great offer and now he (or she) is stuck with a Tenant who, in the end, might not even buy the home if he (or she) doesn’t feel like it and then the Landlord loses a lot of time, energy and money. Because of that, it’s difficult to find rent to own properties in the market.

Sublease, for instance, it’s another setback for rent to own properties. They are difficult to do it as it is; with rent to own properties, it’s nearly impossible. The idea is exciting; making someone else pay for your house, right? But, come on, you have a bargain as it is; stop trying to make it even better for you! Just enjoy your deal.  

Rent to own properties are the dream of people with bad credit and not that much money lying around. If you manage to find one… why not? Sign that rent to own contract and good luck!

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