Rent to Own Pros and Cons

Interested in starting your rent to own dream? At RentOwn.net we have a simple how-to information guide to help get you started.

The rent to own process offers clear advantages to a renter. To start with, renting to own is particularly useful as it helps build a deposit and improve your credit rating: banks will positively assess your savings record over the rent to own lease period, plus you'll have a sizeable deposit for any future loans. But what actual steps can you take to achieve this? The most important thing is to have clear and achievable goals and a timeframe to do it in.

Be clear, have good communication

Renters need to be very clear about what they want and the timeframe in which they want them to occur. It sounds obvious, but sometimes the most obvious things are the most overlooked. Ensure the rent to own contract drawn up clearly reflects these goals and the timeframe. Don't be unduly pressured into a longer, or shorter, rental period time. Don't feel pressured to pay exorbitant rent premiums: remember to negotiate.

Agree upon the sale price and rent payments

As with any property rental or sale, the price and rent of a house in a rent to own agreement is negotiable. However, there are a couple of important distinctions. The first is that the house or apartment sale price is fixed once the agreement is signed. That means that regardless of rising or falling property prices, the price paid if and when the renter chooses to buy is the same as when the contract was first signed, which is often three to five years ago. The original negotiated price is the final price.

Secondly, monthly rent (in most cases), an option fee and the rent premium are also fixed. The option fee gives the renter the chance to not buy the house at the end of the agreed upon renting period. If the renter buys the house then the option fee normally becomes part of any deposit. On the other hand, if the renter chooses not to buy the house, the fee is forfeited to the seller. Finally, rent premiums are also charged as a percentage amount higher than market rents for the area. The premium can either go directly to the seller or it can become part of any future down payment or deposit – this is normally negotiated.

An example to see how it all works

The following is a characteristic example of a rent to own agreement. Let's say the agreed price for the home is $200,000. Market rents in the area are $1000 a month. The rent premium would be about $200 a month, meaning the total rent is $1200 per month. The option fee is negotiable, but is normally between $3000 to $10,000. For this example, we'll choose a $6000 option fee. Hence the total cost of an average three year rent to own lease would be $43,200, of which $7200 is rent premium. The rent premium is normally added to the option fee for a deposit, so by the end of the three year rent to own lease a renter will have a deposit of $13,200. This process is particularly valuable for people who struggle to qualify for a traditional loan. Bank assessors see a three year history of saving and payment, which is a significant credit rating plus.

Lease option, lease purchase and rent to own lease definitions

The rise of rent to own agreements has led to a blurring of definitions with some of the industry's common terms. One such instance occurs with the rent to own lease option and the rent to own lease purchase. Traditionally, the former meant that a renter still had the chance to not buy the house; hence the option part of the name. The latter meant that the renter was contractually bound to buy the house. Today, the terms have been used interchangeably. Once again, clear communication and definitions before signing anything is the key to avoiding any headaches.

How to rent to own for sellers

For sellers, a rent to own lease is a great way to offset mortgage payments if other financial commitments start to overwhelm your budget. You receive rent and rent premiums to pay for your mortgage, plus a legal commitment to buy your property after an agreed upon time. The most important step is to ensure you find the right renter for your property. Advertise and list through as many avenues as possible to ensure maximum exposure. From here, ensure a sound legal contract is drawn up to avoid any misfortune in the future.

Want more details?

As with any financial transaction, there are advantages and disadvantages for all groups involved. What happens if you lose your job two years into a rent to own agreement? What if house prices rise rapidly in your area? For a detailed list of the pros and cons of rent to own agreements, please go to our list of Rent to Own Pros and Cons.



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