Rent-to-Own Arrangements

What is Rent to Own?

A rent-to-own real estate arrangement, also known a "lease option" or "lease-to-buy," is an agreement between a seller and potential buyer wherein the buyer rents the house with the option to buy the property at a later time. Included in this arrangement is an agreement that the renter will also pay an extra monthly down payment which is allocated as a down payment on the future purchase of the property. Should the renter decide not to exercise his right to purchase the home, the renter forfeits the extra monies, which belong to the owner. In rent-to-own agreements the property purchase price is predetermined and included in the contract.

Rent-to-Own Benefits for the Buyer

Rent-to-own agreements may well be the ideal solution for someone who is still on the fence about taking the big plunge to buy a house, someone who wants to test-drive a neighborhood, someone who is waiting to accumulate enough cash, or someone hoping to improve credit rating in order to qualify for a loan.

The following are some of the buyer advantages of entering into a lease option:

•- opportunity to test drive the home before making a long-term commitment

•- opportunity to explore the neighborhood

•- affordable option allowing potential buyers to begin paying off their future home in small, monthly down payments

•- extra cash outlay is essentially returned to renters if they ultimately decide to buy

•- final purchase price is predetermined and thus unaffected by appreciation/depreciation of the property market value

•- no pressure from competing buyers

•- no obligation to buy

Rent-to-Own Benefits for the Seller

Rent-to-own arrangements may also be an ideal solution for sellers who have been unable to sell their property due to a slow real-estate market or for any other reasons.

The following are some of the seller advantages of entering into a lease option:

•- property does not sit vacant

•- owner continues to receive funds upfront

•- if the tenant decides not to buy, the extra monthly fees belong to the owner as compensation for keeping the property locked-in and unavailable to other interested parties during the contractual agreement

•- final sale price is predetermined and cannot go down

•- income from rent can be used toward property taxes, maintenance fees, mortgage payments and insurance fees

Buyer and Seller Beware

For both parties, there are several potential pitfalls in renting to own. Each rent-to-own agreement is unique, and therefore to avoid any legal entanglements it is highly recommended that a lawyer be involved to compose an iron-clad, explicit contract for both parties to sign.

Here are some of the downsides for buyers and sellers to watch out for:

•- many who seek rent-to-own arrangements are individuals who don't yet qualify to buy a home or who have poor credit histories

•- buyers who don't exercise their right to buy end up forfeiting all their premium payments

•- watch out for unscrupulous sellers who have no intention to sell but simply want the benefits of charging above-market rent fees

•- be careful not to confuse lease-option arrangements with lease-purchase agreements, wherein you are required to buy the home