The question of whether or not it’s a good idea to sign a rent-to-own agreement is the wrong question to be asked. The better question is “is a rent-to-own home right for me?” or “am I the right candidate for a rent-to-own home?”. Here’s why…
Rent-to-own homes are subject to several implications and were initially created to tend to a particular portion of the population. Many things about Rent To Own Homes have changed over the years and Rent To Own Programs today are very sophisticated and secure.
Years ago, consumers would use Rent to Own Homes to accumulate a Down Payment in order to secure a Conventional mortgage. This was before Mortgage Insurers like CMHC and Genworth offered Insurance protection to banks for clients who had less than 20% as a starting Down Payment. Today’s programs for Rent to Own Homes are much more advanced and cater to a larger percentage of the population.
Today, the walks of life that use Rent to Own Homes are clients who have something about their Financial Profile that keeps them out of a Traditional Mortgage. It could be that the consumer is Self -Employed, has bruised Credit, has less than 5% down or are New to our Country.
Now that we’ve settled on the correct question to be asking, let’s now dive deeper into whether or not you’re the right candidate for a rent-to-own home. First, however, it’s important to become aware of the benefits and potential risks associated with such an agreement.
How a Rent-to-Own Agreement Works
Rent-to-own contracts are agreements that allow potential future home buyers to rent at a fixed rate while providing them with the pathway to get prepared to purchase the home at a specified date for an agreed-upon future price. With a properly structured Rent to Own Homes program, the price paid in the future is agreed to before the program starts. There is no changing the price a Consumer pays at the end of the program. In Markets where property values grow at a higher than average rate, the consumer will likely exit the Rent to Own Program with significant equity built into the home!
Rent to Own Homes programs normally have 2 agreements. One is a Lease Agreement and falls under the jurisdiction of Local Landlord -Tenant Bureaus. The other is the Future Purchase Agreement which lists the details of the Future Purchase including, but not limited to, The final Price, starting down payment and accumulation of additional Savings towards the Down payment. It is the Future Agreement of Sale that details the portion of the fixed rent expense that is credited towards the purchase of the property.
You sign a 3-year rent-to-own lease-purchase agreement and settle on a future purchase price of $400,000. Your starting Down Payment is ($10,000). Within the contracts, you’ve also agreed on a fixed monthly rental fee of $1200. $500 is saved on a monthly basis to be put towards the down payment of the purchase of the home.
At the end of the 3-year contract, you’ve managed to save an additional $18,000! Deduct the initial $10,000 from the purchase price and you can now prequalify for a mortgage of $372,000 ($400,000 – 10,000(Initial Down Payment) – 18,000 $500/month x 36 months)).
Now, imagine for a second that the property was in an area where appreciation rates took the MARKET value of the property to $ 500,000 over the 3 year Rent to Own Program. The difference between the MARKET value and the SALE price at the end is $ 100,000. This $ 100,000 is equity the consumer inherits when they buy the home.
As you can see, a rent-to-own home can be an extremely beneficial contract for those that can’t qualify for a Mortgage and are in an area where property values are increasing!.
Not only does it allow them to “lock In” a future purchase price, it allows time for the consumer to save for a downpayment while having the opportunity to live in the property before purchasing.
Is a Rent-to-Own Home a Good Idea for YOU?
A rent-to-own home can be extremely advantageous for candidates who are suited for such an agreement. Not only does it allow them to test run the home before buying but it provides them with a window of opportunity to save, improve credit scores, and stabilize their current financial situation. With that said, it’s not for everybody.
To summarize, if you’re not in a financial position to purchase a home through a bank, however, you hope to one day do so, renting to own can be for you. If you desire greater flexibility in where you live and what your obligations are in terms of expenses and maintenance, rent to own might also be for you.
In short, is it a good idea to rent-to-own? The answer…for anyone turned away by their bank….it is a GREAT option to explore!
To learn more about rent-to-own agreements and whether or not it’s a good idea for your personal situation, check us out at https://homeownersoon.com! Our team of experienced real estate professionals are here to help.