Rent to Own 101
Rent to own (or lease to own) is a unique scenario where you pay your landlord an agreed upon percentage of extra rent per month, which is then credited towards your down payment.
This is a way for renters to begin investing in a property they want to own without the immediate commitment of a mortgage and down payment.
There are two kinds of agreements in rent to own scenarios.
1. Rent with the option to buy
This agreement leaves things open ended. The tenant will have the option to buy the home after a given period of time – but is not committed to doing so from the start.
2. Rent to buy
In this agreement, the tenant has agreed to purchase the home after a given period of time.
If you are leasing to own, once you have decided on the type of agreement you are signing, there are some other details to get smoothed out.
1. Agree on the home price. The value of the home now will not be the same price you’ll pay for the home once you finish your lease period. The landlord and tenant must agree upon a set home price, which will typically be more expensive than the home’s current value, to account for inflation and changes in the housing market.
2. Determine the length of rental. You will need to decide (along with the landlord) how long you will be leasing before you buy the home.
3. Agree upon maintenance responsibilities. Normally, the landlord is responsible for all maintenance. However, lease to own scenarios are different. You’ll have to decide who is responsible for taking care of the property/yard before the house becomes yours.
4. Pay the option fee. This is the fee you’ll pay to ensure you have the option of buying the home once your lease is up. This fee can range between 1-5% of the home value.
5. At the end of the rental time, you start looking for a mortgage. Once you begin approaching the end of your rental period, you will still need to look for a mortgage. Many renters think they are avoiding this by renting to own, but the process at the end is still the same. The only difference is that you don’t have competition in the buying process.
In most cases, rent to own is made possible by a landlord who no longer wants the property, but isn’t quite ready to sell. Other times, homeowners who have been trying to sell with no success will allow for a rent to own option to start making profit off their home now.
There are also several organizations who capitalize on the popularity of renting to own and make it easy for customers to get started. Two of the most popular options are ZeroDown and Divvy.
However, most people do not like rent-to-own because
1. You don’t actually own the home (yet)
2. You are buying the home at a higher price
3. You still have to get a mortgage, and you need to pay an option fee
4. Most people sell their first home in under 5 years
You’re better off using a down-payment investment partnership like ours than pouring money into a rent-to own nightmare.
Just check out the difference in price tag.
A typical $1M rent-to-own with ZeroDown costs $6,500/month. On top of that, you’re still responsible for shelling out $10,000 up front! You will still be responsible for a down payment and finding a mortgage when it’s time to buy. Most of this rent is going to the landlord, not to you or your future.
That same $1M bought with Home.LLC costs only $4,500 a month! To top it off – you’ve already covered your down payment and have your mortgage under control. All of your payments are directly investing in your own future.
Rent-to-own sounds nice, but it’s just another way to pour money down the drain that could be invested in your dream home. Check out our website for more information on our down payment top-off investment (read that again: it’s not a loan!).