When you sign a rent-to-own or lease-to-own contract, you are agreeing to lease a house for a predetermined period of time–typically a year, and also to take an option to purchase the house within a predetermined period of time–typically a few decades. Tenants are not required to exercise the purchase option, but the landlord has been locked into the terms of the arrangement.
Mechanics
In a own contract, the tenant pays a fee to purchase the option. Additionally, the tenant pays rent in an amount generally higher than the market rate lease, but some portion of that amount is credited to the down payment. Neither the fee nor the section of the lease that goes to the downpayment is refundable should the tenant don’t exercise the option to purchase.
Benefits
Usually, but not always, the home’s price is contained at the contract. In an escalating real estate market, this can be a substantial benefit to the renter, who would purchase the home in a few decades in the future in #039;therefore price. The worth of the house by that time might be considerably greater than the contract price. And, when the economy ought to tumble, the renter can walk away from the offer. If the option fee wasn't too large and the lease not too much greater than the market rate, the renter hasn't dropped much. The landlord gains from this deal by collecting the option fee and a monthly rent that is greater than exchange rate, plus he gets a renter who’s very motivated to take decent care of the property.
Drawbacks
Some rent-to-own contracts do not include the price of the house. They lay out a process where the price will be determined when the option is exercised. This is a large benefit to the proprietor, who will sell the home without paying a real estate commission. It's a drawback to this renter, however, who would pay an option fee and greater monthly lease to buy a home later on at market rate. It may be preferable to conserve the fee and lease surcharge, then buy a home on the open market when you're prepared.
Warnings
Unlike a normal sales contract, there is absolutely no loan contingency at an rent-to-own contract. In case the renter doesn't qualify for a mortgage from the expiry of this option, he’s out of luck–he loses the option fee and the amount heor #039;s paid toward the down payment. Every renter who considers entering into a rent-to-own contract should run a credit report and talk to a mortgage broker to learn if she can qualify for a mortgage over the option period.
Other Factors
Rent-to-own contracts are best for both landlord and tenant in a limited set of conditions. The deal is reasonable for the landlord who wants a little more in monthly lease, desires tenants which are not likely to wreck his house, and knows he would like to escape the rental company in the long run. For tenants who are looking to purchase a house but lack the down payment and possibly have a minor blemish on their credit reports, the rent-to-own method provides an appealing purchase price that is set in stone at the contract along with a lower down payment.