Renting to own could be a risky venture just like many other things in your life. The good thing about it is that you can easily avoid possible risks by making realistic choices that suit your budget.
Additionally, you may hire a real estate attorney when choosing a rent-to-own home. Real estate agents and attorneys can also be of great help when buying a home by making the purchase process easier and safer.
You can certainly go through this process on your own without professional assistance. Read on to learn how to make rent to own a safe option for you.
Read and Understand the Contract
Today, it can be frightening to sign a contract in a world full of people who are greedy and malicious. You want to be mindful and careful when putting your name on any document or rent to own contract. Before agreeing to a deal, you need to understand what you are agreeing to.
Read the contract carefully. If you aren’t comfortable with reading these kinds of documents, definitely have a lawyer read it for you. If you are a first-time home buyer, you’re advised to have an attorney’s help. They can explain the vague or hard-to-understand sections of your agreement and help you if something goes wrong later on.
There are a lot of things to be clear on when signing a rent to own deal. For example: maintenance and repairs during the lease term, option fees, premium payments, sales prices, and real estate closing.
When Can You Buy the House At the Earliest Opportunity?
You will not have to wait for your rental term to run out to buy the home. The purchase can be made earlier provided you’ve saved up enough money for the down payment.
Even if the lease isn’t up yet, your seller is likely to allow you to end the contract to purchase the house. Not every landlord will allow this, however. That’s because some sellers prefer earning rent money from renters for the full period of the lease. It is three years in most cases.
If you think you’ll qualify for a mortgage and buy the property sooner, sign a contract that enables you to do it whenever you can. Once you can afford to buy the home, close on a house to save some money on rent.
Related: Learn more about Are you Ready to Buy Your First Rental Property?
Where Are Option Money and Premium Payments Being Collected?
In addition to the option fee, there are premium payments that should be saved somewhere such as an escrow account. You will have peace of mind knowing that your money is safe throughout the lease.
Pay rent and be assured that your money is safe yet easily accessible when you need it to purchase the home. The portion of your monthly rent that goes towards the purchase price will be in escrow waiting for you. That will let you focus on improving your credit score without worrying about money.
Another benefit of collecting money in escrow is that it lets you know whether the payments are made in a timely manner. Your rent-to-own agreement can easily become risky and unsafe by missing a payment. The escrow serves as proof of investment that prevents the contract from getting nullified.
What Are the Ways to Break a Contract?
There are some actions taken by buyers and sellers that can break the contract. For instance, the buyer can walk away from the deal by subleasing the home to someone else and starting a sandwich-lease deal. The buyer can also sell the property himself or negotiate with the seller.
A breach of contract occurs if one party wants to get out of it for some reason. You may want to terminate your rent-to-own agreement early due to unforeseen circumstances. Perhaps your finances have changed dramatically or you plan to move to another city.
Whatever the reason, you should be aware of the consequences before terminating the RTO contract with the option to buy. Bear in mind that you may forfeit the premium payments and option fee this way. In that case, all the payments you’ve made will be kept by the seller.
Don’t rush into terminating the contract. Try to find out how to return your premium payments in case of a broken lease. You should also know what actions can cause the landlord to keep premium payments. That will save you a lot of headaches later on.
Related: Learn more about Can a landlord break a rent to own contract?
When the Rent-To-Own Property Can Be Sold to Someone Else?
The first option to buy the house will happen when your lease is about to end. Once the lease is over, the owner will be able to sell the home to someone else in case you give up. So if you don’t make the purchase before the lease expires, the seller will start looking for other buyers.
Sometimes there’s a grace period that comes into effect when the contract period runs out, giving additional time to the buyer to save for the down payment. There are also instances where the lease is extended in a new agreement.
Pick a Home Wisely
By deciding not to buy the home at the end of the lease, you will forfeit the property and lose the money credited towards the down payment. That’s why you should not enter into a rent-to-own agreement if you aren’t sure that you truly want to buy the property. Many buyers change their minds after signing a contract. That often costs them a lot of money.
With that said, you need to be sure you’ll live in that particular neighborhood and home with pleasure for many years to come. The rent-to-own option should be treated seriously just like a traditional purchase when choosing a home.
Be Realistic When Choosing a Home
You may want to buy the house but your credit score prevents you from qualifying for a loan. That is why you should consider meeting with a lender. Try to realize what size deposit and what credit score are needed to buy the property. Ask yourself the following questions:
- Will I have enough time to remove derogatory marks from my credit report and lower my credit card utilization?
- How much deposit do I need for a mortgage?
- Will the money I have saved with my option fee and premium payments be enough?
The answers to these questions will give you a better idea of whether rent to own is a good option for you or not. In any case, you should be realistic about what house you buy. If the credit score and deposit size are unrealistic, search for less expensive, smaller homes. You may also wait a little while before entering into a contract.
Are you a first-time homebuyer with poor credit? Rent-to-own homes give you extra time to fix credit problems and build equity. While it can be an excellent way to buy your first home, you should be careful with it and watch out for scams. Read the contract before signing it and be realistic about what repayments you can afford.