Rent-to-own housing can be a great option if you’re not financially ready to buy a home, but you’ve found a place you know you want to buy. So how do you get a rent-to-own agreement set up?
The terms of rent-to-own homes can vary, but generally, the property owner and the renter will sign a contract in which the renter agrees to rent the property for a specified time. During that time, the renters usually pay an above-market rent, with the excess rent credited toward a down payment when the contract ends. The contract also typically sets a price for the home at the end of the lease.
Benefits for rent-to-own homes
A rent-to-own deal offers prospective buyers an opportunity to settle into a home they want to purchase while they continue to save for a down payment, improve their credit score, or wait for a negative factor on their credit reports – such as a foreclosure or a collection – to fade into the past.
Home sellers typically offer to a rent-to-own contract if their home isn’t selling fast enough and they’re motivated to move out.
What to include in a rent-to-own housing contract
Both the seller and buyer must have the contract reviewed by a lawyer, because multiple issues must be addressed. The terms of any lease agreement should include:
- Length of the lease period
- Rent amount
- Rent credit for down payment and how it will be held until the time of purchase. Both sides need to agree in writing what will happen to the credit if the renters opt out of buying at the end of the contract
- Who will pay property taxes, insurance and homeowner fees during the lease period
- Who will pay for utilities, maintenance, and repairs during the lease period
Other tips to keep in mind about rent-to-own houses
As a renter, you should weigh the option of a rent-to-own contract versus renting a less-costly home and saving money for a down payment on your own. Of course, if you love a house and are determined to buy it, you will want to get a rent-to-own contract, even if it’s a little more expensive.
Make sure you understand when the title is transferred to you and who’s responsible if anything happens to the property while you live in it. It’s a good idea to have a home inspection before you buy the property—even if you’ve been living there for a few years—so that you’re certain of its condition.
Consult a lender to discuss the details of any rent-to-own arrangement, because in some cases a lender will consider the rent credit a seller concession that cannot be included as part of the down payment.
If you’re concerned about home prices rising and want to lock in a home at today’s prices, looking at rent-to-own homes is a good idea, but make sure the contract specifies what happens if home values rise or fall between the time the agreement is signed and you go to settlement. This is one time when the assistance of an attorney who represents your interests should be mandatory.