Rent to Own/ Lease Option
Sometimes the prospect of purchasing a house can be extremely intimidating. Potential buyers often overlook several options that can ease the process of home purchasing. One of these options is the "rent-to-own" alternative. In a rent-to-own situation, the buyer signs a contract which is a mixture of lease and an option to buy the house within a certain period of time. Then, the buyer lives in the house and pays rent with an additional rent premium that will be credited to the purchase price if the house is bought. An "option fee" is also usually required, and can range from 1-5% of the purchase price of the house.
Essentially, the way rent-to-own leases work is by giving the buyer time to build equity, save cash, and repair credit. At the same time, the seller gets an opportunity to sell the house, as well as gain additional income from the rent premium and option fee. Furthermore, the seller's risk is lessened because even if the buyer does not exercise the purchase option, the seller gets to keep the option fee and additional rent premium, which would have gone toward the house in the event of a purchase. That being said, the "option period," the period during which the buyer can purchase the house, is usually less than three years. If this period comes and goes, and no other negotiations or arrangements are made between buyer and seller, then the lease is probably over and the seller will look for a new tenant to take the rent-to-own option.
The sale price and rent amount are determined by the market, but negotiations can be made, as with any financial dealings. If you are a buyer, make sure you do your research so that you are on equal footing with the often-knowledgeable sellers. Furthermore, buyers generally try to get a longer option period, so that they have more time to build up savings and prepare for the large purchase. Sellers usually try to get a shorter option period, so that the buyer is forced to purchase the house sooner and thus the seller will receive those funds. However, if the buyer selects a long option period and is never able to exercise the purchase option, they will lose all of the money that was invested via the rent premium and the option fee.
Posted on January 23 By MLP Lending Guide