Many people looking for a new place to live find themselves in a position where they prefer not to rent, but cannot swallow the idea of making that big purchase. For some, there is an in-between option, also known as "leasing to own" a condo or home. "Rent to Own" or "Lease Purchase" are other terms to describe this real estate transaction.
Use these home buying tips to help you approach a landlord and/or seller with the idea.
- Lease to Own: What is it? This arrangement means that you are renting a unit with the intent of buying it at a future date. The price of the property is set when the lease to own agreement is signed by both parties. A down payment of some amount is typically collected by the lessor for good faith. This amount is sometimes called an "option fee." Monthly payments will sometimes be higher than the regular rent as well. The extra amount is the "rent premium." The fee and premium amounts are credited to the buyer for the purchase. If the buyer defaults on the purchase, all or a percentage of the fee and premium are forfeited to the seller.
- "Assignable" vs. "Non-Assignable." Assignable lease-own mean that the lessee can give another person the opportunity to buy the property at the set purchase price. A wise seller will put in a "Non-Assignable" paragraph to make sure she is protected in the instance that the market rises and the lessee is not in a position to buy the house. In that case, she can sell it at market value to another party and not risk the lessee striking a deal with an investor.
- Pros for Lessees: Lessees who secure lease to own homes in an improving market may find the value of the house they are buying is greater than the purchase price (which was fixed at the time of the signing of the lease-to-own agreement).
- Cons for Lessee: There is some risk for lessees seeking the lease-to-own. People seeking a rent to own arrangement usually do so because they cannot qualify for a home loan at the time. If the finances of a person in this arrangement do not improve to the point where she can qualify for a loan when the date of purchase arrives, she stands to lose the rent premium paid over the duration of the lease up to this point. If you are interested in the lease-to-own agreement, be sure that your credit, savings, and employment status will be able to get you a loan for the purchase when the time comes. Having a lease-to-own will not secure your ability to obtain a loan for the property-you need a lender to qualify you. The seller will still demand a mortgage commitment. Another risk for the lessee is a declining market. If the market sees a decrease in value, the lessee has the choice to either default her premium rent or buy the home at a price that is higher than market value.
- Pros for Seller. In a soft market, a seller can ensure the sale of her property with the lease-to-own. If the buyer defaults after the term to rent is up, the seller makes away with the premium money collected. An increased monthly payment is also helpful for the cash flow of the seller. This income can be put into savings or used for other investments.
- Cons for Seller. If the market in the area for homes is increasing, the seller can be in a position where she is locked into a deal that provides her with less than market value for her property. Also, if there is a change in family plans, health, or financial status over the course of the term of rent, the seller is still subject to the terms of the initial agreement.
- Availability. Lease-to-own opportunities are most prevalent in a slow market. In a hot real estate market, sellers are more apt to cash out to the highest bidder, and not offer this option to potential renters and buyers.
- Legal Assistance. Whether you are a buyer/renter or a seller, make sure you seek legal advice.
Although "Rent to Own" homes and agreements carry risk for both parties involved, in many instances they are very positive agreements based on the benefits for both. In an ideal situation, a seller wanting extra cash receives premium amounts in exchange for allowing a buyer lacking the resources to buy an opportunity to get herself to a point of purchase. Trust is also an important element of the lease-to-own. As a seller, you must have confidence in the buyer to follow through, and a buyer must have faith that the seller will not try to finagle a way to get out of the deal with the premium monies.