A “rent to own / lease to own”, agreement is exactly what it sounds like – a tenant lives in a dwelling and starts paying rent on it – but at a predetermined point in time he will have the option to purchase that property at a previously agreed price. Other terms that describe this sort of arrangement include lease to own, lease option, lease purchase or lease purchase option.
In most cases, this situation involves two separate contracts that run concurrently. One is the lease that the tenant signs with the property owner. It sets out a particular monthly rent (often at the top of the area market) and has a previously agreed term. Usually, you’ll find a term of two to three years is typical as tenants need that much time to get their credit score and/or income history to the state that lenders will approve a mortgage at the time of purchase.
The other contract is the purchase agreement. It contains the purchase price, the date of the purchase and the amount of the down payment that the tenant will make. The agreement generally begins with a deposit 5% or more of the purchase price ($10,000 minimum). Then, in addition to the rent, the tenant gives the buyer a portion of the down payment, to be at the purchase date. So if the purchase price of the home will be $400,000, and the tenant wants to put down 10% ($40,000), and the lease term is three years, the tenant would need to pay $972.22 per month in addition to the rent. This assumes a $10,000 deposit, which leaves $30,000 to be paid out over the next 36 months to get the full down payment in place.
There are some risks involved in this process. If the tenant cannot get qualified for a mortgage in time to complete the purchase, the owner may be willing to extend the term. If not, though, the deposit and the down payment money all convert to additional rent and become the property of the owner.
However, there are also a number of benefits – for those who cannot qualify for a loan today but want to get some sense of security about purchase price in a rising property market, this can be an ideal program. Also, the discipline of monthly saving toward that down payment can build habits that will last long after the purchase price. Finally, you don’t have to wait through another lease or two to get into the house that you want – you can get in there now and start building your down payment to purchase it while you get your credit into good standing.
This can also be used in situation where a property owner already owns the home but is unable to refinance with a bank or a private lender due to credit or lack of equity. In this case, a property owner would need to sell their home. If selling, a property owner can sell and move elsewhere OR sell and remain in the home in a rent-to-own with an agreement to purchase the home back. Below are a few key points to note.
- Property must owner occupied.
- Preferred properties are single family detached, semi-detached, townhouses and duplexes within urban markets. Condo townhouse properties are considered on a case by case basis.
- Property must be in good condition
If you have any additional questions, please reach out to Amansad Financial today.