The rent-to-own agreement offers an alternative path to homeownership for those who lack a down payment or cannot qualify for a mortgage right away due to bad credit scores. Under a rent-to-own contract, the potential buyer moves in and rents out a house with the option to buy it in the near future. What about property taxes? Well, it’s often vague who the homeowner actually is when it comes to a rent-to-own arrangement.
Unlike normal renting situations, the owner doesn’t always pay the property taxes. The buyer is supposed to pay rent while living in the home. He or she is expected to be a new homeowner after buying the property. The buyer and the current owner – be it a landlord or seller – have agreed to make such a deal with each other. However, less scrupulous landlords often turn the rent-to-own or lease-option deals to their favor knowing that they have many more rights than RTO tenants.
Sometimes the seller has the right to evict renters. In the worst-case scenario, the tenant will lose the money (a portion of his/her monthly payments and option fees) that was meant to go towards the purchase price. That’s why you need to read the terms of the lease-purchase agreement carefully before signing anything. Pay special attention to property taxes besides sales price and mortgage interest rates. It’s worth reading!
Maintenance of Rent-to-Own Homes
Depending on the contract terms and conditions, you might be required to pay for repairs and maintain the property. This is the responsibility of the landlord in most cases. If the seller is the actual landlord, he or she will ultimately be responsible for insurance, taxes, and other homeowner association fees. In addition to property taxes, there is a renter’s insurance policy. It is intended to cover the costs and losses to property besides providing liability coverage in case of home-related injuries.
As mentioned above, the money you pay while renting out the property goes toward equity when buying a home. It is usually stated in the contract. However, repair and maintenance requirements aren’t always clearly stated in the rent-to-own agreement. So be sure to understand your responsibilities as a renter. It may involve everything from cleaning the gutters to raking the leaves and mowing the lawn.
You might also be required to fix electrical problems and replace a damaged roof. It is a good idea to ask your lawyer to explain your responsibilities. Regardless of your responsibilities, you should order an appraisal and get a home inspection. Before signing the contract, you want to see the up-to-date property taxes. It’s a prerequisite for maintaining the property.
Property Taxes on Rent-to-Own Homes: Who Pays What?
Now that you know your responsibilities, you should have a clear understanding of the property taxes before signing anything. At this stage, you need to make it clear who’s responsible for taxes in rent to own. It’s not as clear as the traditional home-purchasing process though. Technically, you aren’t the owner of the home after signing the contract. This means the seller will be responsible for paying the property taxes during the rental period. Once you’ve closed on the property, it will belong to you and you’ll become a new owner officially.
Owning a house implies some expenses that a renter is not necessarily required to pay. However, the seller may expect him to pay some of the costs listed below:
- Homeowners insurance premiums
- Property taxes
- Flood insurance premiums
- Maintenance, upkeep, and repairs
- Private mortgage insurance
- Homeowners association dues
- Landscaping costs
As you can see, there are other fees in addition to property taxes. While some renters pay these costs separately, others decide to roll them into their rent premiums or rent payments. So, who pays what? That should be clarified when you work out the terms of your contract. In addition to discussing ongoing homeownership costs with the seller, you should also find out which costs are refundable. This is important because you may decide not to purchase the home in the end.
As a tenant who signed a rent-to-own agreement, you will have to cover the property possessions by purchasing the renter’s insurance. On the other hand, the seller needs to pay for the property insurance and homeowners association fees. What about repairs? They are usually split up in the agreement. While the seller typically pays for major repairs (like A/C repair and roof repair), the renter pays for minor repairs.
Things to Consider Before Signing the Contract
There are certain steps that should be taken before entering into a rent-to-own contract. For example, you need to obtain a property inspection and order an independent appraisal. Make sure the taxes are up to date. Additionally, you should check the seller’s credit report and choose the right terms. When researching the contract, make sure you understand:
- The deadlines
- Rent payments and option fee
- How to exercise the option to purchase
- How the price is determined
- Who is responsible for property taxes and maintenance
Related: How Rent to Own Works?
Be sure to put everything in the agreement to avoid debate and problems down the road. Have it in writing upfront and specify all the responsibilities. Go through the entire contract and read the fine print to identify hidden costs if any. Check if there’s a clause that obligates the renter to pay property taxes. Be careful and good luck!