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How Rent to Own Works

Ae you planning to buy a home soon? Learn How Rent To Own Works! If you’re just getting started, there are so many details that you have to be on top of. Also, there are a myriad of reasons that many people have difficulty becoming a homeowner, this article will support you in getting around […]
how does rent to own work
11.03.2020
Home » How Rent to Own Works

Ae you planning to buy a home soon? Learn How Rent To Own Works! If you’re just getting started, there are so many details that you have to be on top of.

Also, there are a myriad of reasons that many people have difficulty becoming a homeowner, this article will support you in getting around them.

Some people are not capable of affording the upfront costs. Others cannot qualify for a mortgage because of a bad credit score. This is where renting to own comes in!

Rent to own (aka lease-option or lease to own) is a good alternative to the regular home buying or renting process. It has a lot in common with both; It’s leasing a house until the final purchase at the end of the lease.

how do rent to own homes work

Lease to own includes everything from lease option agreement to rental payments and an option fee. You’ll be paying rent throughout your lease besides property taxes. So be ready to deal with the rent payment on a month-on-month basis as well as other monthly payments.

It is always a good idea to familiarize yourself with the rent to own process beforehand. This guide can help you understand how this process works and what to expect after signing an agreement. It will walk you through all the important elements of this process, contract basics, alternative options, and much more.

Renting to Own: How Does It Work?

It works when a renter signs a rent-to-own contract and starts to lease a home from a landlord. The tenant has an option to buy the home when the lease expires or before that. As a tenant, you need to consider a set price before reaching an agreement.

Not all rent-to-own contracts are flexible and buyer-friendly, so be careful when signing one. It is best to hire an experienced real estate lawyer to examine your contract. That will give you a better understanding of your rights before entering into anything.

what is rent to own

Also, take into account the upfront option fee that must be paid in advance. You can receive rent credits for future housing costs during your leasing term. Take advantage of this opportunity if possible.

Rent to own generally works for both the seller (the current homeowner) and buyer (tenant) thanks to various incentives involved. The buyer will be able to get money back after buying the home. The seller isn’t allowed to sell the home to someone else till the end of the lease.

Some deals don’t work. That usually happens when the home buyer doesn’t have enough money for a down payment. In that case, the seller gets rent payments that serve as compensation for his/her time.

If the tenant doesn’t want to buy the home, the seller will also receive additional compensation. It consists of rent credits and option money. So it’s in the interests of both parties to have a rent-to-own deal that works.

What Are Rent-to-Own Houses?

First things first, you need to find a rent-to-own house. While the owner may look to sell such a house, he or she may not be capable of selling it right now due to different reasons. Even if the homeowner can legally sell his/her home, the housing market might be too slow at some point in time.

To prevent the homes from sitting empty and attracting squatters, the sellers rent to own them. The person who rents a rent-to-own home is supposed to buy it later on. The landlord loans the house to that person (potential buyer) until he or she can purchase it at some point.

It’s a win-win situation for both the landlord and the tenant. Until the probate gets clear or the market opportunities improve, the seller can earn money meanwhile. On the other hand, the home buyer can move into a home immediately. This allows him to improve his credit score and get approved for a mortgage after a while.
There’s no guarantee the house is going to be sold out during the contract term though. The tenant isn’t obligated to purchase it. Yet rent-to-own deals work in most cases since most buyers want their money back – the money invested in premium payments and option fee.

How to Rent to Own a House in 4 Steps?

You will rent it out just like you’d in other home lease situations and pay an option fee, which can be anywhere from 1% to 10% of the purchase price. That involves entering into a rent to own agreement. It acts as a deal in which the signer commits to renting a home for a particular period.

Once your lease runs out, you will eventually buy the home and get the option payment credited by the seller. A typical rent to own agreement includes an option to purchase the house at a later time.

Many homebuyers don’t want to be under any obligation to buy the house or property. If you are one of those people, then you need to sign a lease-option agreement. Unlike the lease-purchase agreement that requires buying a home/property, the lease-option doesn’t involve purchasing the home once the lease expires. The same goes for rent to own.
If you don’t buy the house at the end of the lease for some reason, the seller will keep the option fee. This is how the rent-to-own process works in a nutshell. Please note that there could be many more details, depending on the terms and requirements specified in your contract.

how does the rent to own home process work

We are going to break down this process into 4 steps to make it as simple as possible for you.

Step 1

Choose a home that fits your needs and budget: After researching rent-to-own home options on the market and finding the “right” ones, you need to contact the sellers. Then you should visit both the neighborhoods and homes. Consider all the options available and select one that works best for you.

Step 2

Agree on terms and purchase price: Check the seller’s public records before agreeing on terms and making a deal. Also, try to find the relevant info on the home before negotiating the contract terms.

Step 3

Lease the home after coming to an agreement: You can move into the house once you sign the agreement and pay the upfront option fee. You will also have to pay the monthly rent to get a certain percentage (at least 5 percent) of your credit toward the down payment.

Step 4

Buy the home: As a buyer, you will be able to use your rent credit and option fee almost immediately after purchasing the home. To become a new homeowner, you will be required to pay the closing costs. This usually involves obtaining a home mortgage loan.

The Basic Elements of Rent-to-Own Agreements

Just like in any lease agreement, there will be different requirements in your rent-to-own contract you need to meet. Every contract is specific, so these requirements may vary widely. Most rent-to-own contracts share the same basic elements though. These contract basics, i.e. key components, include:

  • Closing Time Frame
  • Standard Rent
  • Purchase Price
  • Maintenance and Option Fee
  • Rent Premium
  • Purchasing the Home

We will discuss each of these elements below. So continue scrolling to learn more!

how do you set up a rent to own contract

Tenant Checklist

Try to follow every step of the process when leasing to own a home or property. To be sure you satisfy all the requirements and have everything needed, we have created a 5-step tenant checklist for you. Take a look below.

  1. Perform deep research: First of all, you need to find a local real estate agent and weigh the alternatives. Once you find something that suits your needs, you should estimate the home value and get several inspections.
  2. Make sure a seller is a trustworthy person: Don’t shy away from requesting the credit report and payment history (pay attention to mortgage account statement) of the landlord.
  3. Make the deal: Complete your application to be accepted. After agreeing on the contract terms and the purchase price, you will have to sign the rent-to-own agreement. Then you will be required to pay the rent for the first month and option fee during or shortly after entering into the contract.
  4. Rent the home: Require rent payment receipts every month. Ask the seller to keep your rent credit in escrow. You are also advised to follow up with your seller at least every three months to provide updates and discuss rent credit. Make the necessary repairs and treat the house well to avoid potential conflicts with the seller.
  5. Close the deal: Once you’ve obtained mortgage financing, you will finally be able to buy the home and close the deal. You will receive closing documents after making the purchase. Finally, the title will get transferred to your name, meaning you have become a new homeowner.

The Rent-to-Own Contract Basics

In this section, we will explain the basic elements of rent-to-own agreements. That should make it easier for you to go through the entire process without running into trouble.
Even so, you should consider hiring a lawyer to review all the elements of your contract. This is often helpful, especially for first-time homebuyers, as there are always difficult to understand terms that require clarification.

Not only will your process run smoother with an attorney, but it will also cut down the risk of making a deal with a scammer and signing a fraud contract. The real estate attorney will help you identify scammers. Be wary of scams!

A rent-to-own contract provides a tenant with legal protection (Related: Can the Seller Get Out of a Rent-to-Own Option?). It makes sure that every premium goes toward the down payment. Besides, the contract will ensure that you get the option to buy the house. If you do not purchase the house eventually, the contract should protect you from lawsuits.

Closing Time Frame (The Time to Close on a House)

How long does it take to close on a rent-to-own home? This is something that should be negotiated with the seller. That will give you a better idea of how long your lease is going to last.

Ideally, this time frame should match the time required to save for a house down payment. You may use a Home Down Payment Savings Calculator to estimate how much you should save each month. That can help in creating savings plans toward the down payments.

Once you come up with a savings plan, you’ll have to discuss the dates of lease payments with the landlord. You also need to confirm the actual mortgage of the home as well as other expenses. The goal is to make sure everything is paid off on time. That prevents disagreements between the seller and tenant during the rental term.

A home closing time frame is anywhere from 1 to 3 years in most cases. Both long and short closing time frames have pros and cons.

The short lease allows the tenants to move into homes without having to wait for years. However, it may take longer for them to get approved for a home mortgage. They often have a hard time bringing up their credit score in a small timeframe.

The lengthy lease (like a 3-year lease), on the other hand, gives enough time to tenants to build equity and improve their credit score. However, they need to pay standard rent for longer besides maintenance and other fees.

Standard Rent

Tenants are required to pay rent every month throughout their lease. Make sure that your base lease rate is in line with the average market value. This will prevent you from getting ripped off.

Many tenants contact local mortgage bankers to check whether they overpay for their rent. Alternatively, you may use the free rent estimate tools or rentometers. The online rent calculators allow home buyers to compare their rent with market averages.

Use these tools to calculate and determine fair market rent. Try to find homes in the neighborhood that are offered at a similar rental price. Reach out to a local mortgage banker and consult with him on the home’s rent.

The due date for all monthly payments should be specified in your agreement. By sticking to payment dates, you will not face nullification of your rent-to-own contract. Your contract also needs to specify the exact amounts that go towards the down payment and rent. Obtain written confirmations in your contract on dates of payment just in case.

Purchase Price (Selling Price)

There are two possible scenarios when it comes to property purchase price:

  1. In most cases, the purchase price is determined at the start of the rent-to-own contract based on the anticipated house’s worth in the future.
  2. Sometimes the tenant and seller decide on the home price after closing the deal.
The first scenario

Homebuyer and seller usually agree on a home price before entering into a rent-to-own contract. They should align the purchase price with the fair market value for homes in that particular area. Indeed, they need to estimate the future market value based on the current value of the local housing market.

Thankfully, there are a lot of house value estimators today. Most websites of major banks contain these tools. Your best bet is to consult mortgage bankers specializing in the local real estate market. You will get a more realistic home-value estimate.

Keep in mind that the selling price of the home will be locked in as soon as your lease commences. It will remain unchanged until the end of the lease no matter the future changes in market value.

The second scenario

The aforementioned scenario can be a double-edged sword sometimes. If it doesn’t work for you, you should ask the seller to set the price upon home closing. The purchase price, in this case, will be determined based on the market value when you buy the home.

This generally works for both parties since it’s tricky to predict future housing market trends. Whether the real estate prices drop or grow, either party will be in a no-win situation. In fact, either the seller or the buyer will stand loseose something in the end.

Let’s assume that the housing prices will drop at the end of the lease. While the buyer will avoid paying too much for the home and probably back out of the agreement, he/she is likely to lose the option fee as well as credits accumulated.

If the buyer decides to save the rent credits and upfront fee by purchasing the house, he/she will risk forking out lots of money for it. What about the seller? The landlord will get a better deal by selling the home above the current market value.

However, the market may skyrocket likewise. The seller will then lose the opportunity to capitalize on price growth. On the other hand, the tenant will turn it to his/her benefit by purchasing the home at a lower price point.

EXTRA TIP: You may also ask the landlord to refund a certain percentage of the lease you’ve paid every month. It will serve as an inducement to buy the house. Maybe the seller won’t agree. If so, ask him/her to match the amount of cash you’ve put in.

Maintenance and Repair Fees

Maintenance expenses decrease the home’s profitability. Nonetheless, you should not avoid maintaining your rental property since that will eventually diminish its value.
How much money is going to be spent on maintenance will depend on various things. Some tenants do all the maintenance work themselves, while others hire professionals to get it done for them.

The weather conditions and location of the home affect these costs, too. For example, harsh weather conditions may take their toll on a walkway, roof, and facade.
Regular care and repair charges add to the rental ownership cost. However, the well-kept properties yield higher rents and help in offsetting the extra money paid for general care and repairs.

Your rental maintenance costs may include:

  • Property Grounds – Sometimes the tenants are required to take the financial burden for ground maintenance. That may include maintenance expenses for the lawn, play areas, outdoor features (like pools, hot tubs, or spas), ground bedding, etc.
  • Exterior and Interior – This often includes fees for cleaning windows, carpets, and draperies, as well as expenses for interior and exterior painting. There are also annual inspections of cooling and heating systems and roofs.
  • Equipment and Appliances – Rental properties might include mechanical equipment like the water heater, furnace, and different kitchen appliances. Plus, there are air conditioners, clothes washers, and other electrical appliances that require annual or periodic maintenance/repairs.
  • Government-Required Home Repairs – In some areas, landlords are required by local law to make their rental properties match city and county regulations. This involves making various property and house upgrades. For instance, they might need to install fire-rated exterior doors, security window grills, tall deck railings, etc.
  • The tenants technically act as the homeowners in rent-to-own scenarios. Even though they don’t have title deeds yet, they’re supposed to pay maintenance as well as other fees during their lease term.

Even so, make it clear who will pay the utilities and maintenance fees before signing the contract. These details should be specified in your rent-to-own contract.

Unlike traditional leasing, rent-to-own deals usually assume that the homebuyer will be covering repairs, maintenance, utilities, and other fees. The landlords, on the other hand, are supposed to pay insurance and property taxes. That makes sense as they’re responsible for the property and house.

Related: Who pays taxes on rent to own home?

Aside from this, you need to address concerns like house modifications and renter’s insurance policy. Clarify all of these matters to establish awareness and avoid confusion. This will prevent problems from arising after entering into a rent-to-own agreement.

Option Fee

The option fee is another key element of rent-to-own agreements. This fee is meant to guarantee the exclusive option, allowing the renter to buy the house in the future. It isn’t optional, as its name may suggest. The tenant must pay the option fee to buy the rent-to-own home.

It’s usually a non-refundable fee and it may range anywhere from 2% to 10% of the home selling price. Once you qualify for a home loan mortgage – no matter when that happens during your lease term – your rent credits and option fee will go toward the down payment.

If the renter fails to buy the house, he or she will forfeit this fee so that money will remain in the seller’s account. The seller is not allowed to sell the home to someone else during your lease term.

Also, the seller can’t force you to forfeit or buy the home before your lease runs out. As a renter, you can take advantage of the entire time frame defined in your rent-to-own contract.
The agreement also needs to specify the exact amount of your option fee. Furthermore, it should clarify how the money can be accessed when buying the house and where that cash will be kept.

NOTE: Bear in mind that the option fee shouldn’t be paid in cash. Although the cash payment is the most common arrangement, the option fee can also be paid through legal trades. If the seller agrees, you can exchange anything from a gift card to a car and motorbike.

rent to own homes how does it work

OPTION FEE EXAMPLE

Let’s say the house you wish to rent to own is offered at $100,000 on the market, whereas the down payment is $20,000 (20% of the selling price). And let’s assume that you should pay $5,000 (5% option fee) at the beginning of your lease.

Your option fee ($5,000 in our example) will be credited to the $20,000 (your down payment) when you buy the home. That means you’ve already saved 25% of your down payment.

Rent Premium (Rent Credits)

Many renters pay rent premiums besides standard rents. It’s a percentage of their monthly rent costs applied towards the purchase.

The rent premium also represents a rent portion credited back to the tenant when buying the house. While this percent may vary broadly in negotiations, it usually goes somewhere between 15% and 25% of the rent price.

Related: How does rent credit work?

What does it mean to the homebuyers? The potential buyers will need to pay more for their rent than they would otherwise be required. However, they will get money (rent credit) toward the house purchase. It should be noted that just the rent premiums, not standard rents, go toward home equity.

The premium payments are supposed to match the down payment and closing time frame as well. While most home buyers and tenants have premium payments, some sellers charge fair market rents. They simultaneously credit some money towards the down payment. That’s known as a rent credit.

The rent credit is usually stored in the seller’s escrow account (separated from his/her bank account). That amount of money serves as a part of the down payment.

There are 2 possible outcomes: the tenant can purchase or not purchase the house when the lease expires.

If you buy the house, all the premium payments you’ve made will be taken away from your down payment.
Sometimes the tenants don’t want or can’t afford to buy the house. In this instance, the total rent premiums paid over the course of the leasing term are kept by the seller.

how do i rent to own a home

An Example of Rent Premium

Let us suppose your standard rent is $1,500 – the rent you pay to the seller each month. You should ask the landlord to set aside $300 and hold that money in escrow. You’re also supposed to contribute $300 to the escrow account.

The percentage (it’s 20% in our example) of the monthly rent payment saved in escrow is the actual premium. You will pay $1,800 for rent, which is more than you’d pay for the rent-to-own home normally. The landlord will repay that money when you buy the home, though. It will go towards the down payment, i.e. home purchase.

If your lease term is 3 years, for example, you’ll save nearly $11,000 from rent premiums. You might be wondering how this works for the seller. The catch is that you will have to purchase the home to get your money back.

Rent Premium Variations

Some landlords are charging fair market value (FMV) when taking rent. After the home purchase, they refund a percentage of that money to the buyer.

This is a great deal for the homebuyer; however, it is uncommon because not many sellers agree to such a deal. Matching all the premium payments of the buyer is a more popular rent credit variation with the sellers. So it’s more likely that your seller will agree to this variation.

We will use an example to explain how premium matching works. Let’s say the landlord is willing to match $200 (your premium payment) besides contributing $200 to the escrow account.

You will save $400 ($200 + $200) per month. Assuming that your lease term is 3 years, you will save $14,400 (36 months x $400). It is 48% of the total cost of your down payment.

Purchasing the Home

Now that you have a better idea of how option fees, standard rents, and rent premiums work, it’s time to end the lease and buy the home. A rent-to-own option should be treated as a commitment to purchase the house at the end of the lease term.

Not everyone can afford to buy a house. By the way, many renters would rather not purchase the house once their lease ends.

what does it mean to rent to own

Check this example to get a better understanding of this concept and learn how this works. We will add up your total rent-to-own savings.

Let’s say the rent credit you’ve accumulated was $11,000 while your option fee was $5,000. If so, you would save up about $16,000 by the time your lease runs out. This is around 50% of your down payment.

You are under no obligation to purchase in the end. This is your right. However, your rent premium would expire and you would not be able to get your money back as the option fee is non-refundable.

You would also lose complete equity you’ve earned toward the house. That would allow the landlord to keep your rent credit and option money too. Do you really want to lose that money?

what are the pros and cons of rent to own

Advantages and Disadvantages of Rent to Own

Renting to own is often a beneficial option that helps save money and pays off for renters over the long haul. Though it can also carve out a massive dent in your budget if you aren’t careful.

That said, you should get to know the benefits and drawbacks of rent-to-own agreements before signing one. We will shed some light on the pros and cons to help you make the right decision.

Advantages of Rent to Own

Build Equity

Rent premiums apply toward the down payment of the home. These premiums equal approximately 20% of the standard rent. That would let you accumulate a few thousand dollars in several years.

Improve Credit

In addition to building equity, the rent-to-own can do a great job of repairing credit history and increasing credit score. It can keep your balances low and eliminate debts. Thus, it can increase your chances of qualifying for a mortgage.

Get Familiar with the Home and Neighborhood

While renting a home, you will learn more about the property and neighborhood before you take ownership. Take advantage of this time to explore the weaknesses and strengths of the house. Check if there are repairs or improvements that should be made.

Fixed Price

By agreeing on a set or fixed home price, you would not have to worry about fluctuating housing prices. It doesn’t only eliminate the uncertainty but also encourages renters to improve their spending habits and re-organize personal finances.

Another good thing about a fixed price is the opportunity to gain some cash when your lease expires. However, this is only possible if the actual fair market value is higher than the fixed price for the house.

Disadvantages of Rent to Own

Unforeseeable Risks

It is tricky to predict future housing circumstances because the rental market constantly changes. That’s why homebuyers are inevitably subject to market risk. By overestimating the home price, they risk overpaying costs above the actual market value.

Ever-changing mortgages rates can put renters in jeopardy sometimes. The banks can place the house in foreclosure in the event of unpaid mortgages and taxes. So they may end up leaving their premises besides acquiring debt on their end.

Related: Rent-to-own vs rent

Strict Regulations

The homebuyers are undergoing strict regulations during their lease. They face serious consequences when their rents are not paid off on time, even if they are only 24 hours late.
That put them at risk of facing rental voids and losing rent premiums. As a tenant, the last thing you want is to have a premium credit that doesn’t count towards the down payment.

Is Rent to Own a Good Option for Me?

As we have already stated above, rent to own is a more favorable option than buying a house at once for many home buyers. It is particularly beneficial for people who cannot qualify for a home mortgage loan or afford down payments. Getting a loan with bad credit is often impossible.

Whether you are a first time home buyer or a recent grad looking to buy a house immediately after college, rent to own can be a great option for you. Unlike the traditional route to homeownership, it doesn’t require a down payment right away. This is advantageous for homebuyers who can’t get their home loan approved instantly.

However, keep in mind that rent to own may pose risks. So it’s not worth the risk sometimes. Whether or not this is a good option for you will depend largely on your financial situation.
Maybe you would like to buy a house later on, but you can’t afford a down payment. Perhaps you have a high debt accompanied by bad credit that prevents you from getting a loan. If so, rent to own may not be a good option.

Notwithstanding, you should evaluate if you’re likely to succeed with this rental option. Here are some questions you should ask yourself before making up your mind:

  • How long have I worked in my industry or career? (Everything above 3 years is considered good)
  • What is my credit score? (Ideally, it should be higher than 620)
  • How much of my yearly income do I put into savings? (More than 20% is desirable)
  • What is my debt-to-credit ratio? (Your ratio should be less than 25%)

The answers to these questions will help you realize whether you need to embrace the lease to own. If not, then you should look for alternative options.

What Are Alternative Options?

Perhaps you think rent-to-own is not a good option for you. A low credit score is the most common reason for failing to rent to own. Some people withdraw from this option because they have already saved enough for a mortgage or down payment.

Whatever the reason, you may want to search for other housing options that work better for you. The following are good alternatives to renting to own.

Buying with a Federal Housing Administration (FHA) Loan

FHA’s mortgage programs are one of the most popular alternative options. These agreements involve making down payments on homes. This is a great way to buy a home on favorable terms while meeting different financial qualifications. For example, you can get a 3.5% down payment with a credit score above 580.

These are insurance programs in which you pay premiums to get coverage for a possible lender loss or similar things. This option is great for homebuyers having enough cash for small down payments.

Purchasing a House Through a Regular Mortgage

Honestly speaking, this is a more favorable option than renting to own for people who can qualify for a mortgage right away. It allows them to build more equity in their house without spending extra money on rent.

Anyone capable of making a 20% down payment (or more) should consider this traditional option. With a good job history and credit score, chances are good you will get approved for a mortgage.

Renting a Home

Those who need several years (more than four) to improve their credit would rather choose classic renting. It is also recommended to people who cannot pay upfront costs such as option fee. As soon as you can afford an option fee and other rent-to-own costs, you should consider starting your trip to owning a house.

how does a rent to own mortgage work

How to Get Started

You have decided to enter into a rent-to-own agreement after reading through this guide. But with so many responsibilities coming with it, you don’t know where to start.
To help you get started, we have created a strategy for you. We will provide you with guidance – instructions and some advice – every step of the way.

Make a Decision on a Home and Property

Look for rent-to-own houses offered online. You will come across tons of housing listings no matter what country and city you’re searching for. Once you have found something that suits your needs, reach out to the seller. Ask him/her to tour the property and see the home.

While inspecting the home and property, try to detect broken or damaged things. Take the time to explore your new neighborhood beside the house. That will give you a clearer idea of whether it’s a place you would like to take up residence in.

Ask for Advice From an Expert

Once you’ve picked a home, you will need to consult mortgage loaners. They can give you advice on how to repair your credit and qualify for a home loan. Having a high credit score makes it easier for renters to get a loan.

Try to find out more about the home’s history, too. Investigate the past transactions of the seller to confirm his/her credibility.

Sign a Rent-to-Own Contract

Use an option to purchase a rent-to-own contract after contacting a professional. Consult a real estate attorney to make sure the arrangement works for you before signing a contract.
An experienced lawyer can help you understand the agreement clauses. Your attorney should also work on assessing the propositions of the seller. This is a good way to check if the seller is trustworthy. That will reduce your risk of being a victim of a scam.

Move Into the House

After signing the contract, you’ll finally be all set to move into the house. Your housing endeavors won’t end there.

Make good use of your lease term to build a complete financial portfolio and increase your credit score. Additionally, you should continuously earn passive income while saving for your down payment at the same time. It is worth the effort!

Mitigating Risk on Your Rent-to-Own Contract: A 4-Step Risk Mitigation Strategy

Every legal contract may pose a risk. The same is true for rent-to-own contracts. That is why the buyers must be careful before they agree to lease-option. It deserves thorough consideration.

is it better to rent or own a home

Take advantage of the following mitigation strategies to reduce contract-related risks.

Step 1: Conduct a Thorough Research

Try to find out just about everything about the house you wish to rent to own before signing the contract. Make sure there is nothing unusual or suspicious concerning the home and property as well.
Examine the public records of the seller to see if he/she has ever been involved in illegal activities. You want to make a deal with a trustworthy landlord, not a scammer. Use the information gathered from your research to evaluate advantages and shortcomings.

Step 2: Commit to the Down Payment

When entering into a rent-to-own agreement, you should agree that you will eventually purchase the home. That is why the potential homebuyers pay rent premiums along with upfront option fees.

That said, it is always a good idea to reach an agreement by committing to the home. If you fail to buy the house once your lease runs out, you will waste a few thousand dollars. That would put a big dent in your budget. Who wants this?

Step 3: Improve Your Credit Score

It is important to be realistic about personal finances before buying a home. Not everyone can get a mortgage loan at the end of the lease. It can take a serious toll on your finances.
In addition to losing the option fee, you can also end up without the equity you’ve invested toward the house. To prevent this, you should build your credit during your lease. The last thing you want is to waste money.

Step 4: Develop Your Backup Plan

Even if you’ve followed the previous steps of this risk mitigation strategy, something may go wrong during your lease. It is really difficult to keep everything under control and stay on top of things. That’s because many things are unpredictable or hard to predict.

As we have mentioned earlier, rent to own may give rise to unforeseeable risks because of an uncertain future. Don’t leave anything to chance. Prevent your process from being subject to risks by creating a backup plan that can solve potential problems.

If you think the seller will manage the home equity, take advantage of an escrow to increase the security of your payments. Sep up an escrow account. It is a secure way to hold money in trust while waiting for transactions to be completed.

Your funds will be protected all the time by opening an escrow account. That will prevent the seller from spending your money (your option fee and rent credit) until you close or your lease runs out.

The Bottom Line

Treat your rent-to-own process seriously just like other home purchasing options rather than taking it lightly. As a homebuyer, you are more susceptible to scams and risks, so don’t rush into signing anything.

Weigh the disadvantages and advantages of lease-option and do thorough research beforehand. Once you are sure everything is okay, you will be ready to start your journey to buying and owning a house.

If you have already decided to take this route, go through our listings to find the home of your dreams. With thousands of rent-to-own homes across the states, you’re bound to find something that meets your expectations.

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For Sale by Owner (FSBO) vs Realtor Stats

To save money, about 50% of homeowners sell their homes without hiring professional real estate agents. Around 30% of home sellers find buyer’s agent commission to be an unnecessary expense, while 14% have a deep distrust of them. What’s Better: Realtor Home Sales or...

Rent to Own Homes Near Me Free Listings

Rent to Own Homes Near Me Free Listings

Are you in the market for a rent-to-own home near you? You will come across a wide range of options, including rent to own lease, owner-financed homes, foreclosures, single-family homes, and traditional lease options. With so many housing options, it can be tricky to...

How Much Is an Option Fee

How Much Is an Option Fee

Looking for a rent-to-own home on the real estate market? Chances are the sellers ask you to pay the option fee before agreeing to initiate the purchase process. Read on to discover what those are. The option fees and earnest money are often confused for one another....