The short answer? NO…not with properly structured programs!
Rent-to-Own Homes can be extremely beneficial under the right circumstances and they shouldn’t be viewed as inherently deceptive because, well, they’re not. Today’s Rent to Own programs feature many benefits that outweigh the “perceived” risks of a Rent to Own program. With any type of financing there could be risks but they are related mostly to the repayment habits of the applicants. Ask your bank how long they will let you stay in a home after you stop paying?
Renting to own can be highly advantageous for the right candidate, especially if it’s properly structured to create balance and fairness between the Future HomeOwner and the Investor.
In what follows, we’ll be discussing the benefits and risks associated with rent-to-own homes for buyers so that you can gain a better understanding of the terms and conditions associated with a rent-to-own contract.
While there are no intentional “catches” or hidden terms to a standard rent-to-own contract, failure to understand the details may result in signing yourself up for a contract you weren’t prepared for. Continue reading to find out more!
What You Need to Know
Often referred to as a standard lease-purchase agreement, rent-to-own contracts are an agreement that allows potential home buyers to rent a property at a fixed rate while providing them with a path to purchase the home at a later date for some agreed-upon Purchase Price.
Although some rent-to-home agreements look a lot like standard rental agreements between landlords and tenants, they aren’t inherently the same. The primary distinction between a typical lease agreement and a lease-purchase agreement is the precondition that states a portion of the fixed rent expense is credited towards the purchase of the property.
The idea behind this stipulation is that it allows those that lack savings or capital the time to save more towards the down payment on the purchase of a home.
The Agreements in a properly structured Rent to Own Program Stipulate exactly what the obligations are, financial and otherwise, for the Tenant (Future Home Owner) and the Investor(landlord). There should be no surprises and the terms are NOT subject to change at the discretion of either party. All terms are and conditions are disclosed and agreed to by all parties before a Rent to Own program starts.
So, what’s there to complain about? In other words, what’s the catch?!
There are no Catches with today’s Rent to Own Programs. If you are concerned about the contents of a proposed Rent to Own Agreement, take the agreements to your lawyer and obtain Independent Legal Advice. It is strongly recommended for anyone considering a Rent to Own Program.
Long story short? Read the fine print, get advice and ensure that all terms and conditions are understood before signing the dotted line.
The Limited Risks of Renting to Own
As mentioned in the preface, there are several advantages of rent-to-own homes, especially for the right candidate. However, that’s not what this article is about. Let’s dive a little deeper into the potential risks of renting to own that you may not otherwise be aware of.
Overstretched Service Ratios.
Because a rent-to-own contract stipulates that a portion of the rent is credited towards the purchase of the home, it’s likely to inherently result in a higher fixed lease rate. Whenever a consumer is looking to enter a Rent to Own Program, the provider MUST ensure there is affordability for the Tenant. Unsophisticated Rent to Own programs do not always properly vet the applicant for affordability. This could create risk of default but it has nothing to do with the concept of Rent To Own. It is the Provider!
Before you enter a Rent to Own Program, ensure the proposed payment structure is within your budget!
Improperly structured Contracts.
Many rent-to-own agreements in the past have not been structured to ensure success of the Rent to Own Program or Tenant. Remember, the goal of a rent to Own Program is to create a pathway for the tenant to become the future homeowner. Any Rent to Own Provider MUST ENSURE their contracts are compliant with Mortgage lenders and Mortgage Insurers alike. Properly structured Contracts are KEY to a successful Rent to Own Program exit.
This is another reason we strongly recommend ILA- Independent Legal Advice.
Aggressive Appreciation Rates.
Because a rent-to-own contract requires the tenant and landlord to agree upon the future purchase price of the home (typically 1-5 years out), the program MUST feature appreciation rates that are consistent with the history of Real Estate trends for the area and allow the client the client to qualify for the future mortgage at the end.
In the past, greedy Investors would charge appreciation rates that were much higher than historical appreciation rates for the area. The properties would not appraise at the agreed to future purchase price and the tenant would be declined for financing at the end. The property would end up being veiled less than the purchase price. The ONLY way a tenant could exit in this situation is to cover the difference between the market Value of the property and the purchase price agreed to.
Make sure the future purchase price is realistic for the area you are buying in!
Is a Rent-to-Home Agreement Worth it?
As discussed, there are advantages and disadvantages of renting to own. Contrastingly, there are also advantages and disadvantages to purchasing a home. It really comes down to your current financial position…
In any case, as long as you as the buyer do your due diligence and ensure that all terms and conditions are agreed upon and understood, with no fine print left unread, a rent-to-own agreement can be extremely beneficial for the right candidate.
That, however, is up for you to decipher. Need help? Visit us at https://homeownersoon.com/rent-to-own-application/. Our experienced team of professionals here at Home Owner Soon are here to help!