Rent-To-Own home buying is a process that is often misunderstood. There are no standard rules or procedures that apply to this type of transaction, so each one can be different. Buyer and seller are free to draft any type of agreement that meets their mutual purposes within the bounds of laws that govern real estate sales and leasing where the property is located.
Buyers considering an RTO purchase should understand that few of these sales ever close escrow. Most tenant/buyers lose interest in the property during the lease period, are unable to come up with the total down payment at the end of the lease, or fail to qualify for a purchase mortgage. Many enter the transaction with one or more misconceptions that doom the deal from the beginning.
Here are the five most common misconceptions about rent-to-own home buying transactions:
- Rent-To-Own Involves Seller Financing. In the vast majority of RTO purchases, the seller does not offer financing and the buyer must obtain a standard residential mortgage before the lease expires.
- Rent-To-Own Is A Way For Buyers With Less-Than-Perfect Credit To Purchase A Home. Most RTO sellers require that buyers meet the same credit and income standards that a bank will require to qualify for a mortgage. After all, they enter the RTO sale with the expectation that the tenant will be able to secure a mortgage when the lease expires.
- Rent Payments Are Applied To The Down Payment On The Purchase. This is true only if included in the lease/purchase agreement. Many RTO sellers charge an “option fee” instead. The option fee locks in the opportunity for the tenant to purchase the property at the time specified in the agreement, but it is not applied to the down payment.
- If The Purchase Is Cancelled, The Tenant Gets Back The Portion Of The Rent That Was To Be Applied To Their Down Payment. Maybe. Most sellers will include a “liquidated damages” clause that allows them to keep some of that money as a penalty for the buyer pulling out of the deal.
- Buyers Begin Earning Equity During The Lease Period. Very seldom. Ownership isn’t transferred until the lease becomes a purchase.
Do you have questions about rent-to-own home buying or other real estate transactions? Drop me a line!
John A. Souerbry & Associates (BRE 01370983)
Tags: Rent To Own home sales, Real Estate Owner Financing
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