Renting to Own: What You Need to Know

By
Real Estate Agent with RE/MAX Executive Realty 91362

 

What to Know About Rent to Own Properties

Young people often struggle to buy their first home. However, if you can buy your first home at an early age, you are likely to save money in the future. It is nice to think about a property as a home, but you should also think about it as an investment for the future. Above all, remember this golden real estate rule!

Buying your first house when you are young often means that you are much more likely to pay off your mortgage earlier, and you will also have more equity in your home.

By following sound financial advice at an early age you can put yourself in a better position to buy a second home later in life or just be more comfortable in general.

The Benefits of Renting and Buying

Travel to Europe and you will soon hear many young people talking about renting to buy. It is a popular concept which has been around in Europe, as well as the US real estate markets, for a long time.

Lots of folks wonder how rent to own works. In the article at Maximum Real Estate Exposure, you'll find an in-depth explanation of the concept of renting to own a home. Renting a home to own allows you to potentially buy your first property at an earlier age.

The idea of renting to buy is no stranger to the US real estate market either. Take a little bit of a closer look at this popular European concept, and you will find that it makes perfect sense.

Key Facts About Renting to Own

  • A rent-to-own agreement is a real estate transaction that you commit to renting a property for a specific amount of time, with the option of purchasing it before the lease expires.
  • Rent-to-own agreements have a standard lease, as well as an option to buy the property at a later date.
  • Lease-option contracts provide you the right to purchase the house when the lease expires, while a lease-purchase contract requires you to buy it.
  • You pay rent during the lease period, and in most circumstances, a percentage of the rent is applied to the agreed-upon purchase price.
  • In some rent-to-own contracts, you may find that as a tenant you have to maintain the home and pay for any necessary repairs.

Saving Up Your Money While You Are Renting

Quite often Millennials are the perfect candidates for rent to own. Most of the time, paying rent represents a big chunk out of your income and you want to be a first-time buyer at some point in the future anyways.

Renting to buy programs work in a variety of ways, and you have to pick the one which is right for you.

When you initially join a rent-to-buy program, you agree with the homeowner how many years you would like to rent the property for as a tenant. A two-year term is an average time frame in these circumstances.

Look around for rent to buy programs that fix the buying price of the property. In other words, you agree on a purchase price when you start living in the property as a tenant. That gives you something to aim for and gives you credit score in order if you have just started your first job.

The Importance of A Credit Score

Even when you are renting to buy, a good credit score is essential. The idea is that it gives you a couple of years to get a good credit score and save up for the deposit. Buying a house with bad credit isn't easy. An excellent credit score means that you will pay less interest on your mortgage.

However, here is the kicker, a lender may look more favorably on your credit status. After all, you will have a track record of having paid the rent for a few years and saving money at the same time.

Basic Facts About Renting to Buy You Need to Know

There are a few things you need to make sure that you are familiar with before you enter into a rent to buy agreement.

Key Points About Rent to Buy for Beginners:

You may be asked to take out an option. Often they are not refundable, so you want to make sure that you don’t overpay for an option. The cost is usually around 2.5 - 7 %.

Is it refundable? Options are not necessarily refundable, and you should consider it a cost. But, the upside is that options are often negotiable. Be prepared to pay for some maintenance costs. Yes, you may have to pay property maintenance costs. Once again, you could perhaps negotiate them. The lower the expenses are, the more money you can save towards your future home purchase.

It is in your interest to keep them low. A lease option allows you to buy the property when the lease expires, but you are not legally required to buy it.

A lease-to-purchase agreement requires you to buy the property at the end of the lease. Unless you are 100 percent sure that you can afford to do, and that it is the best deal, it is better to avoid lease-to-purchase agreements.

What happens to the money you pay for the lease or rental period? Some programs will put part of the money you pay towards the purchase costs. They are the best, and you should try to look out for those.

From an owner's perspective renting to own can be the best of both worlds when trying to decide between renting or selling.

Do I Still Agree on a Purchase Price?

Yes, you still agree on a purchase, but you should always negotiate. Often the offered purchase price is higher than other property prices in the same area. That is okay if it is an upcoming neighborhood. But if you are not sure that prices are going to go up, you should not agree to a higher purchase price.

Above all, you should consider if you can afford to get together enough deposit monies and qualify for a mortgage for the agreed purchase price. A lease-option allows you to opt-out, and if you find a property at a better price at the end of the agreement, you can always buy that one instead.

As a matter of fact, that gives you a little bit of leverage to re-negotiate an agreed purchase price at the end of the lease agreement. No matter what, it is still tough to predict the home buying market.

Make Sure You Understand What You Are Getting Into

It is essential to understand what you are getting into. Crunch the numbers before you sign on the dotted line. If you can lock in the right price, renting to buy is a great option. If you already have a good credit score, you are the ideal candidate. In that case, all you need to worry about is saving up the money for the deposit that you may already have agreed.

If part of your rent is “credited” towards the purchasing cost, you can’t really lose out on the deal. But, you need to make sure that your money can’t earn you more in some other kind of savings program. That is unlikely, as interest saving rates are still low.

Renting to buy gives you something to aim for, and if you get it right, it can save you a lot of money in the long run. Just make sure you do your research and ask for legal advice as you agree to a legal contract that can be enforced.

Laws associated with renting and buying property vary from state to state, and it is crucial to make sure you are aware of the laws in your home state.

Final Thoughts on Lease to Own

It is essential to know precisely what you are getting yourself into when agreeing to a rent to own agreement. Make sure you think about both your long and short term housing goals and needs. Never make a rash decision. Could you be better off waiting before entering this kind of agreement?

Additional Helpful Real Estate Resources

  • Millennial home buying trends - do you know what the younger set is looking for when purchasing a house? In the article at Huliq, you will discover some of the most prominent house purchasing trends for Millennials.
  • What to do when moving to a new house - see some solid tips on what you should be doing upon your arrival into a new place at Realty Biz News. Learn what your priorities should be as you end the moving process.
  • Real Estate articles for buyers and sellers - get a compilation of outstanding real estate articles all in one place. You'll see a showcasing of posts written by multiple bloggers. If you are going to be buying or selling a home this is a must-read resource.

Read these articles to make excellent decisions when you are going to be buying your first home.

 

Posted by

Bill Gassett is a thirty-two year veteran to the real estate industry. He enjoys providing helpful information to buyers, sellers and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, National Association of Realtors, Inman News, Placester, RESAAS, Credit Sesame and others.

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Rainer
536,984
Sham Reddy CRS
H E R Realty, Dayton, OH - Dayton, OH
CRS

Very informative blog, thanks for sharing!

Young people often struggle to buy their first home. However, if you can buy your first home at an early age, you are likely to save money in the future. It is nice to think about a property as a home, but you should also think about it as an investment for the future. 

Oct 24, 2019 04:32 AM #1
Rainmaker
939,186
Bob Ratliff
Robert Ratliff Realty - San Antonio, TX
"Sold with Bob"

This blog post was very interesting and you outlined rent to own very well. Here in Texas we licensed real estate professionals are not allowed to assist in "rent to own" properties. I still find it very interesting and learned from your blog. Thanks. We can however do owner financing but not rent to own in Texas.

Oct 24, 2019 04:54 AM #2
Rainmaker
5,121,090
Barbara Todaro
RE/MAX Executive Realty - Franklin, MA
Marketing Agent for The Todaro Team

Good morning, Bill Gassett everything one needs to know about "rent to own" is right here.... another great post.

Oct 24, 2019 05:22 AM #3
Rainer
505,979
Dörte Engel
RE/MAX Leading Edge - Bowie, MD
ABC - Annapolis, Bowie, Crofton & rest of Maryland

Dear Bill,

Around here, you need to put down option money for a rent-to-own situation. With all the community down payment programs out there, I recommend not shelling out option money, but buying with a low down payment instead. Another possibility is a first right of refusal, where the tenant buys at some point in the future, but does not give any money to the home owner other than the rent. Since young people's work situation is still developing, this gives them better flexability, in case they get transferred in or out of state. No need to lose any non-refundable option money, if you end up not being able to purchase that particular home for whatever reason.

Oct 24, 2019 06:36 AM #4
Rainmaker
1,993,707
Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Good morning Bill Gassett - this is a very good discussion of the topic.  A well deserved feature.

Oct 24, 2019 08:33 AM #5
Rainmaker
1,094,638
Margaret Goss
Baird & Warner Real Estate - Winnetka, IL
Chicago's North Shore & Winnetka Real Estate

I've been asked a few times about rent-to-own but I've never done one or known another agent that did. I would have to say it's rare in this area. 

I'm wondering why a seller would give up part of his rent as part of the down-payment. That could only work if the rent were higher than normal, right?

Oct 24, 2019 08:51 AM #6
Rainmaker
761,007
Jill Sackler
Charles Rutenberg Realty Inc. 516-575-7500 - Long Beach, NY
LI South Shore Real Estate - Broker Associate

A really comprehensive post! So much good information. I learned a lot.

Oct 24, 2019 09:01 AM #7
Rainmaker
2,485,290
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

This is one "bill" we want to act on....

Oct 24, 2019 12:18 PM #8
Rainmaker
457,258
Tom Bailey
Margaret Rudd & Associates Inc. - Oak Island, NC

Good post Bill. I am not a fan of rent to own for the buyer or the seller. Most of the ones I have seen ended badly 

Oct 24, 2019 11:23 PM #9
Rainer
288,671
Ron Aguilar
Continental Mortgage - Saint George, UT
Mortgage & Real Estate Advisor since 1995

Bill, this is an outstanding post to share with us. Thank you.

As a Mortgage lender I get this question from future buyers. This explanation will help me to further advise my peeps.

Oct 25, 2019 08:54 AM #10
Ambassador
837,561
Mimi Foster
Falcon Property Solutions - Colorado Springs, CO
Voted Colorado Springs Best Realtor

Concise and informative post. Rent to own is not popular here for a lot of reasons, the main being that Sellers are afraid their house will be worth a lot more when the time comes to close. Congrats on the feature!

Oct 27, 2019 06:11 AM #11
Rainmaker
2,791,120
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

Owning to own is always the best way to go if you want your own lifestyle

Nov 20, 2019 11:46 PM #12
Rainmaker
2,791,120
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

Mimi Foster Seems like I haven’t been on your blog a while I hope you have been well and everything is all good with you. :)

Nov 20, 2019 11:47 PM #13
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Bill Gassett

Metrowest Massachusetts Real Estate
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