What is Rent to Own

The traditional route to owning a house has started to give way to a fresh and more flexible approach: rent to own properties. Here at RentOwn.net we not only have the best properties, but we also provide clear information about the whole process. So what exactly is rent to own?

Most people would probably be familiar with the rent to own concept, which was first established in the United States in the early 1950s. Back then it applied to appliances and home furniture: a shortage of cash and an uncertain political and social environment led to many cautious consumers. Adverse financial conditions are once again responsible for driving the growth of the rent to own business model, this time in rent to own homes. Financing is limited and buyers are scarce; the buyers that are looking are cautious. In many instances, the sellers of rent to own homes have already bought another house elsewhere, but are struggling to find buyers. Conversely, buyers struggling to gain financing may find a home faster. Regardless, the basic tenets of the rent to own property concept from the 1950s appeal today: the renter or buyer has the ability to slowly pay a large amount of money over a period of time, rather than committing to a large lump sum payment.

What's attractive about rent to own

A rent to own house approach is a popular and sensible option for many aspiring property owners as the tenant usually has the choice to buy the property at a fixed price after they have moved in. The timeframe varies, but the agreement usually spans three to seven years. This, of course, has obvious advantages: the family, individual or couple can get a good feel for the house and neighbourhood before committing to the largest purchase of their lives. Additionally, any adverse impacts– such as job loss or rapidly declining property prices in the area – are also mitigated. The converse is also true: if values increase then the payments count towards the purchase of the home. Another buyer who might be attracted to the rent to own house is someone who has trouble gaining financing or coming up with down payments, but have the ability to make larger than average monthly repayments. In all cases, the renter agrees to pay a non-refundable deposit at the start of the rental period. This, depending on the contract, can be added to the down payment of the property. Renters also agree to pay a certain premium each month in addition to the monthly rent; this added premium often goes to the vendor, but occasionally a portion becomes a part of the final payment. At the end of the rent to own agreement the renter is left with a sizeable deposit and a good history of payment, allowing them to access a more traditional mortgage. Hence, the rent to own name.

Things to look out for

There are also some important fees and hidden costs to be aware of in the rent to own home approach. Buyers have to be aware of what is affordable/unaffordable for them and project payments based on real-world scenarios, rather than ideal scenarios. The monthly payment may seem reasonable, but there is commonly more expenditure than expected with a rent to own house. For example, the initial monthly payment on a $180,000 house is just over $1000 a month at the current, and historically low, interest rates. But how long will this last? Interest rates are already increasing, so it is important to factor several different rates into any calculation. Buyers with bad credit ratings could also be slugged with an extra 1-2% premium, easily adding $300 to the monthly repayment. Additional fees to consider include property taxes, home maintenance costs, utility bills, mortgage insurance, home and contents insurance and property taxes. These combined fees could easily surpass $2200 in monthly payments, more than doubling the initial estimate.

The goal is to own

The final and critical point to remember is that rent to own contracts should only be a part of a larger plan to buy the home. People who aren't serious about ultimately buying the home should avoid renting to own as the contract will result in more fees and higher monthly repayments. For more detailed information on how to enter a rent to buy agreement, please see the other section of our website titled How to Rent to Own. For a comprehensive list of the advantages and disadvantages of the rent to own home, please see the section of our website Rent to Own Pros and Cons.

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