An Example of How Rent-To-Own
A seller is selling his home on a Rent-To-Own basis for $150,000 with a monthly rental rate of $1,000. A prospective buyer, who cannot qualify for a mortgage right now, wants to purchase the home. They agree to an option fee of $5,000, which secures the right for the buyer to purchase the home within 24 months for the price of $150,000. This option fee will apply to the closing costs or purchase price when the buyer purchases the home at the end of the option period. Additionally, they agree that if the buyer pays the rent on time every month they will receive $50 per month as an option credit, which also applies toward the purchase price of their home or toward closing costs. After 24 months the buyer is able to qualify for a mortgage and purchases the home.
The Basics of Buying and Selling with Lease Options or Rent-To-Own
Real estate markets across the country are suffering right now. Sellers are experiencing difficulty selling their homes and buyers find it more difficult to obtain a mortgage loan. Home buyers, home sellers and the real estate agents that represent them must get creative and look for alternative solutions.
What is a Lease Option or Rent-to-Own?
Lease options, also known as rent-to-owns, lease with option to buy, or rent with option to buy, are a way to buy and sell homes without an immediate conventional mortgage. It gives home buyers (tenant/buyers) who can’t qualify for a mortgage right now the opportunity to get into a home right away while they improve their credit and build up a down payment while living in the home. It gives home sellers the ability to fill their property with a serious tenant buyer. Sellers can reach a far greater pool of potential buyers. They are more likely to sell their home quicker. For some sellers it may be the ONLY way they can sell their home in this real estate market and for some tenant/buyers it may be the ONLY way they can have the opportunity to live in a home that they are working towards purchasing in the future.
How Does a Lease Option or Rent-to-Own Work?
A lease option works like this: The buyer and seller agree to an option which gives the buyer the right to purchase the home during a set period of time. During this option period the tenant/buyer (lessee) leases the home from the seller. The seller may not sell their home to anyone else during the option period. By the end of the option period the buyer must either purchase the home by obtaining a mortgage or forfeit their option deposit and potential rent credits.
Benefits and Advantages for the Tenant Buyer
Here are some of the advantages for the buyers when buying on a lease option:
- The buyer can get into a home now, even if they can’t currently qualify for a mortgage.
- They can improve their credit and build up a down payment while they are already living in their future home.
- They are not obligated to purchase the home at the end of the option if they decide the home is not for them, that homeownership is not for them or if the real estate market changes significantly.
- The buyer can avoid a costly and time consuming ‘double move’.
- The buyer can enjoy increased privacy and security over traditional ‘apartment life’.
- Real estate experts have predicted that home values nationwide may have reached rock bottom. There exists a very real possibility that the home could significantly increase in value by the end of the option period. (This has occurred frequently in similar markets in decades past)
- Our available homes are in most cases much nicer and cleaner than the average ‘straight rental’ property on the market today.
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