The housing market today is still recovering from the housing crash, especially the homeowner part of the housing market. Less people are buying and more are renting. Housing sales, while improving, are still low. This makes a great opportunity for a rent to own setup between you and your buyer. What are the basics of rent to own in the housing market?
When You Can’t Sell Your Home
Trying to sell your home can be something of a hassle these days. rent to own can be a great option for when you’re having trouble getting your home to sell or you need cash flow for your new home. In a rent to own agreement, you and the buyer can determine a time (usually a minimum of one year and a maximum of five) in which the buyer will essentially be a renter and pay you rent every month. A portion of this rent generally goes toward the purchase of the house, the process of which will begin when the rent to own contract is up.
What Will the Rent Be Like?
In a rent to own agreement, typically the rent will be higher than market value with the seller agreeing to put the extra rent away for a potential down payment on the home when the agreement is up. Tenants will pay rent to you as a normal renter would, and when the agreement is up, your renters will decide if they’re ready to buy. If they decide not to purchase, you’ll either have to put your home back on the market or find another renter. When renters decide to walk, they’re not entitled to get their extra rent/down payment back. However, make sure this is in the contract!
Buyers Lack Credit or Financing
You’ve found a great buyer who is really interested—but their credit is poor or they can’t get proper financing to afford your home. Consider a rent to own agreement. This works out well for you as you’ll begin getting paid for your home right away, and your buyer will be happy because this gives them a way to build their credit to attain proper financing for when it’s time to go through with the purchase. Credit and reference checks will still apply to these potential buyers, as they will essentially be your renters for the next few years.
Lock in Prices
You can lock in home prices in a rent to own agreement. This means that by setting a price in the contract, the buyer must pay that price when it comes time to buy, regardless of market value of the home. If you expect your home price to decrease within the years that the contract is active, this is a plus for you. If you expect it to increase, however, you can always set the lock-in price for higher than the home was appraised for now. Your buyers will want proof that this price is valid, so make sure to have an appraisal done.
Some owners find that having tenants who plan to live in the home long term take much better care of the property than a typical renter who is planning to move out as soon as the lease is up would. Regardless, you’ll need to specify who is responsible for maintenance and repairs in your contract. Since your name will still be on all paperwork regarding the home, you’ll still be responsible for home insurance, property taxes, and some maintenance. What maintenance needs to be done and who will pay for it can be specified in your contract. Usually, the majority of these costs are handled by the renter since it’s likely that the renter will soon own the home.
Stipulations Still Apply
Although it’s not a typical rent agreement, a rent to own arrangement will function much like a rent agreement until it comes time for the renter to buy. This means that any stipulations you have in place, such as no pets or no additional occupants not specified on the contract, still hold. You’ll need to outline what any violations of these stipulations will mean for the tenant and for their option to buy. Many times, if a tenant violates any of the stipulations, the contract will be void or fines may apply.
rent to own agreements can work out very well for both the owner and the renter—it gives the owner relief from having extra mortgage payments while also the chance for them to make extra money in case the potential buyer decides to walk. For the renter, it enables them to have the chance to purchase a home while building up their credit.