How does rent to own work?
Rent to own is also known by several terms such as lease option, lease to own or lease purchase and are all used to describe the same basic rent to own concept.
Rent to own basic overview
In a rent to own purchase, the buyer signs a lease and an option agreement. This allows the buyer to rent the home as well as give them the option to purchase the home at a set price during a certain time period. There are 5 important parts in a rent to own transaction. They include the rent, rent credit, purchase price, option length, and option fee.
Rent credit
The rent credit is the amount of rent that gets put towards the down payment. It can either be a set portion of the market rent or an amount above the market rent. For example, if the market rent is $1,000 per month, the seller might credit $300 of that towards the down payment. Or, they might ask $1,000 per month rent and a $200 rent credit for a total of $1,200. Make sure to pay on time. If it is late, the seller might have the option of not giving you the rent credit for that month. Be sure that all details of the rent credit are included in the option agreement.
Purchase price
The purchase price is one of the most important parts of the rent to own agreement. This is the amount the buyer will purchase the home for. Before signing any type of contract, do a little research and make sure the price you agree on is a fair price. Even if the real estate market goes up or down, the purchase price will not change.
Option fee
The option fee is is a one time fee paid at the start of a rent to own purchase. If the buyer purchases the home within the agreed upon time period, 100% of the option fee will go towards the purchase price or down payment. If the buyer does not purchase the home it is non-refundable and becomes rent for the seller. The option fee is normally 1-10% of the purchase price.
Option length
The option length in a rent to own agreement is the amount of time the buyer has to get their own mortgage and purchase the home. This time period normally ranges from 3-5 years and can sometimes be extended is the seller and buyer agree. If the option period expires the buyer will lose all rent credits and the option fee.