Rent to own can be a very effective and efficient way of purchasing a property for folks who do not have enough down payment or not high enough credit score, but please bear in mind that problems could occur without enough due diligence for everyone involved.
How does it work?
The tenant and the owner sign an Option to Purchase agreement whereby the tenant pays the landlord a fee and thereby gathers the right to purchase the property in a set time typically a few years from that date.
How much is the fee?
It usually is about 2 %~2.5 % of the purchase price.
Is that the entire amount that tenant pays?
No, tenant will pay the rent plus a small amount toward the down payment of the purchase price of the property. Usually this would end up being close to 5% of the purchase price of the property.
What is the benefit of doing rent to won?
As mentioned above the most common reason that people go with this contract is that they either do not have enough down payment for the property they are trying to purchase and they chose this method. Another reason they might want to go with rent to own is that they do not have a high enough credit to be approved for the mortgage hence choosing the rent to won option while they are increasing and improving their credit score.
By doing so, you could also benefit from some other advantages such as trying the neighborhood before purchasing the property to see if you like living there or not and if it doesn’t suite your lifestyle you could cancel the contract.
Another benefit is that once you sign a contract with the buyer you will be paying a certain fixed amount at the closing date of your contract do if the market has fluctuated and the price of this property has gone up you would still pay the same amount specified in the contract no matter what.
Now, on the other hand if the market collapses and the prices drop if you decide not to go with the contract you’d have that option and you could withdraw from it.
This period should give enough time to the tenant to build their credit score and also gather more down payments by the specified date on the contract.
This could also be beneficial for the landlord, as the tenant would take an extra care of the property while they are living there, since they will be the future owners of the property.
One of the more common issue is the middle men coming between the landlord and the tenant as they will charge a fee to manage the property should the contract doesn’t close with the tenant and the deal doesn’t go through. If that third party disappears all would be wondering who owes whom and who owns what and what rights they have. There also are instances in which the property has a second mortgage, which could also cause the tenant to evacuate the property should it go into default.
For folks who do not qualify for a mortgage the rent to own might be the best option but do not forget that just because you are going to through this option you should not take it as serious as purchasing a property as the Rent to Own contacts should be just as much paid attention to as if you were going through a purchasing of a property.
Now, what are the disadvantages to the rent to own option?
There are also some downfalls to this option. One being is that if you withdraw from the contract for any reasons you would lose the option payment. And also the profit you’d make is fixed at the time of the contract.
Also one thing that tenant should bear in mind is that, usually it is mentioned in the contract that if the tenant fails to pay even one month of rent the option and the contract is void and that they would lose the option of buying the property. If that is something you like changed in the contract you should have it revised so as long as the tenant pays the rent on a timely fashion they contract should be binding.
Also Landlords should pay attention and make sure that option payment is covered in a separate agreement. If the option payment is included in the lease it will be very difficult to get the tenant to evict should they be in default.
As a precaution there are a few things you should do.
One would be going through land registry office and obtaining a copy of the owners’ title record. Doing that would allow you to know who actually is the property under the name of and how much of a mortgage is registered under that particular property. Off-course, there is a fee associated with that. Having said that such fees rather be paid than saved as it could prevent much higher damages if you have not done your homework right.
For purchasing a property the deposit is held in a trust account of a brokerage until the closing date of a contract. That should also be the case for a rent to own agreement. It should not be paid to the landlord or any other third parties.
Another very important precaution that should be taken is to register a lease or the agreement against title. This way the tenant is protected against any possible issues that might arise. Again there might be a fee associated with that, but such fees are better paid than saved.
Another very effective way is to run everything by a lawyer and
get legal advise
to make sure everything is done right and just in case anything happens in future your lawyer would be the one taking care of the issue. And as always try avoiding third parties trying to interfere in the process by offering you some incentives to get involved and get some rights in the property. This step is the most important step as it would protect both parties to make sure everyone on the contract understands all the terms and condition mentioned in the contract and there are no ambiguities to prevent further issues.
This option of purchasing a property could work beautifully for both landlord and the tenant of prepared right and if all the necessary precautions have be addressed.
Babak Sobhani