What Is Rent-to-Own?
By Elli Davis, December 12, 2011
Rent to Own by Steve Snodgrass
The aim of the vast majority of young adults is to become completely independent. One of the signs of independence is, without a doubt, owning a home. Prices are getting higher and higher, however, and purchasing a home can be a huge and sometimes difficult transition. Not only do most people have insufficient funds to buy a home outright, but many do not even qualify for a loan.
For those who have trouble purchasing a property now, rent-to-own might well be the solution! This concept first appeared in the United Kingdom and a few other European countries under the hire-purchase model. Rent-to-own is a legal transaction under which an object is leased in exchange for regular payment with the possibility of sale in the future. While it is a practice mainly used with consumer goods, it is very common in real estate too.
How Does Rent-to-Own Work?
It is very easy. A homeowner agrees to rent their property for some period of time — usually up to three years. During that time, the tenant has an option to buy the home. It is important to mention that the price of the place does not change; it has to remain the same during the whole period, no matter how the housing market and home prices fluctuate.
The rent-to-own contract usually requires a non-refundable deposit that has to be paid to the seller. If the tenant does purchase the property in the end, this money goes towards the down payment of the property. If they do not buy the place, the homeowner has earned a healthy sum. As well as the deposit, a weekly or monthly rent has to be paid. It is not uncommon that it is a bit higher than it ought to be in the current market conditions. Some part of the rent is credited to the future down payment as well.
Benefits of Rent-to-Own
Homeowners
Homeowners by Brent and Amanda
One of the biggest advantages is the certainty the income. Whether their home will be sold or not, sellers get a fairly nice amount of money every month for a couple of years. The deposit is also fantastic for those who do not sell the place in the end. All this money very often helps to pay off mortgages homeowners have on their new home. It is very difficult to sell a home sometimes, and rent-to-own is a part of the solution for many.
Buyers
For buyers, rent-to-own can be just as ideal. You know how important it is to actually live somewhere to find out whether the place is right for you. With rent-to-own, this is exactly what you get. Nobody else can purchase the house you are living in under the contract, so you have a lot of time to decide. One usually discovers all the bugs a home has only after they move in. Once they purchase the property, it might be too late to complain. With rent-to-own, the situation is different.
The home does not, in the end, have to be purchased by the consumer. If she/he changes her/his mind, it is perfectly fine; the agreement will simply terminate and the property has to be returned. Nobody is obliged to buy anything. It might happen that one party gets into financial problems when the agreement is still on and just cannot afford paying for the place anymore. In that case, the homeowner can just rent or sell the property to another buyer. Simple as that. You will lose some money (the deposit), but it definitely is better than spending years in a place you do not want to live in.
Disadvantages of Rent-to-Own
This all sounds very nice and promising, which it certainly is, but rent-to-own does not only have a positive side. Many might not realize how much money they will have to pay every single week/month for their property. It does seem beneficial and, in the long term, it might well be, but if it costs you most of your monthly salary it can be frustrating after a few months. Another disadvantage, for both buyer and seller, is that while home prices are changing, the home has to be sold at the pre-agreed price. Either the buyer or the seller will thus be a little harmed once the purchase takes place.
Rent-to-own is not meant for everyone. In spite of some negatives, however, it is safe to conclude that rent-to-own is a fantastic opportunity for (in the words of Roy Singh, a real-estate broker working at Century 21 in Waterloo, Ontario) those people “who have a slight problem that keeps them from qualifying for a mortgage and need some time."
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Landlords and Tenants
Royal LePage Ltd. Brokerage
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Tim thought on December 16th, 2011 12:36 pm
Remember that the buy out price at the beginning of the contract shouldn’t be too aggressive because if the bank does not agree with the appraisal at the end of the term, the buyer may have to come up with more money than provided by the mortgage.