You see the ads everywhere, but how does it work and is a rent-to-own deal right for you?
You may have seen more and more people advertising that they have a house or condo for sale, and offer to do a rent-to-own. It seems to be becoming a popular way for selling a property, but not a lot is known about exactly how it works, and to whose benefit.
When a seller advertises that he will consider doing a rent-to-own deal, he will be looking for someone to lease the house with two contracts. One contract will be a regular lease contract, and the other will deal with the purchasing part of the deal. This contract will be for a period of time that is agreeable to both the seller and the buyer, usually anywhere from one year to three years. Many people think that the seller will simply set aside some of the rental money as a down payment contribution, but this is not exactly the case. The buyer will have to pay the regular amount of rent, and in addition they will have to pay a monthly installment that will be credited towards the down payment.
There are usually clauses in the contract that state if the buyer is late or misses any payment, the contract is null and void. As well, the buyer may be responsible for repairs and maintenance; however sometimes the seller will accept responsibility for major maintenance issues.
One thing to keep in mind is that house prices are always changing. The calculations are based on today’s prices, and it can be next to impossible to calculate what the house may be worth in the future. Sometimes this is addressed by agreeing to a certain percentage increase for each year of the term, and sometimes sellers will ask you to agree to pay the appraised value of the house at the end of the term. (In this case, you may have to pay a little extra at the end of your term to meet the 5% down payment.) The seller will also want a down payment deposit, generally not less than $5000.
Here is an example of how the seller may calculate your monthly contribution towards the down payment:
Say the purchase price is $200,000, you have agreed to a 2 year term, and you have already paid $5000 towards the down payment. In order for you to save up enough money for a 5% down payment in 2 years, you will calculate five percent of $200,000 and divide that by the 24 month length of the contract. So in this case, you will need to save up $10,000, but since you’ve already paid $5000, your monthly contribution is $208.33. Keep in mind that this will be in addition to your rent payment. If the buyer decides to walk away from the deal, they will lose their deposit money, as well as any money paid towards the down payment. At the end of the contract, you must be able to qualify for a mortgage for the remaining balance.
Not every seller will structure the rent-to-own in the same way, but as in any real estate deal, you can always try to negotiate the terms that are not satisfactory to you. It is very important that you get independent legal advice for any contract that you sign.
For some people who need time to repair their credit score, or are unable to save up for a down payment any other way, this can be a great way to eventually purchase your own home. You must be very sure that this particular real estate deal is of benefit to you, and that you can afford to take the risk of not being able to follow through with the contract.