Rent-to-own, also known as lease option, is an investing strategy that can be used by both home buyers and home sellers.
For home sellers, lease option may be the perfect solution to ensure you get top dollar for your home in a buyer’s market. It may even generates some extra income for the seller before the actual sale of the home. The rent-to-own strategies also increases the number of potential buyers for your home to include those who do not qualify for the conventional mortgage from banks.
In a rent-to-own or lease option, the homeowner rents his/her property to a potential buyer (lessee) with the exclusive right to purchase the home within a certain time period, usually 3 years or longer. The homeowner cannot legally sell the property to anyone else during the period defined by the lease option. The homeowner and lessee would negotiate in the beginning of the lease the term of the lease to include the purchase price, option or earnest money, monthly payment in addition to the rent.
For home buyers, rent-to-own make sense if you don’t qualify for conventional mortgage because you don’t have a down payment, poor credit score, limited employment history, high debt-to-income ratio. This allows home buyers time to save up the required down payment, improve credit scores, establish a longer job history, or whatever they need to do to get a mortgage.
Rent-to-own homes also allow family to move into their dream home and give them time to save enough for a d down payment to buy the home, without worrying that home being sold to someone else.
The rent-to-own or lease option is one strategy with 2 real estate transactions - the leasing portion and the option portion.
The lease portion is very similar to any lease agreement between the landlord and tenant. And, then, the is the option portion, which should be a separate agreement in which owner agrees to give the lessee exclusive right to purchase the property within a specific period of time and for a predetermined price.
Remember, the option agreement only grants the lessee the “option” to buy the home. The lessee is not obligated to buy the home. On the other hand, the homeowner is legally obligated to sell the home to the lessee under terms set forth in the option agreement. Therefore, the option is only binding for the homeowner.
In the rent-to-own or lease option home, there is an option fee, which is an up-front charge, similar to a down payment. The option fee can be whatever amount the homeowner and lessee agreed on, usually dependent upon the value of the home.
If you’re the buyer, it is in your best interest to negotiate the lowest fee possible. The option fee is generally non-refundable, but will be applied toward the lessee’s down payment when the time comes to apply for a mortgage.
If the lessee later decides to not execute the purchase option, the seller can keep the fee.
And if the parties do not renew the rent-to-own lease the buyer continues to live in the property as a month-to-month renter. Or, the homeowner can sell the home to a retail buyer.
Search Zillow’s Homes for Rent.