When the housing market is soft, sellers who can’t move their home quickly off the market commonly lease their property to temporary tenants. And some sellers will consider leasing their home as a “rent to own” property. In this market, if you’re a renter interested in buying a home but don’t have the down payment substantial enough to do so, this can be an excellent option. So here, we’ll explore what it means to “lease to own” and some of the advantages to both sellers and buyers.
Renting to own can be an easy, low-stress, inexpensive way to buy, sell or invest in real estate. Rent-to-own purchases typically work like this: The lease of a home is combined with an option to purchase the property within a specified period of time (usually 3 years or less) at a particular price. The renter pays a non-refundable “option fee” (like a security deposit) which is sometimes 1% to 5% of the price, which goes toward the purchase price of the home. Usually the renter pays the monthly rent payment plus an additional premium that is also credited to the purchase price.
How the seller benefits from a rent to own situation
Often times the seller has a better chance of getting the full asking price and a higher monthly rent payment for the home on a rent-to-own property. That’s because the seller is giving the buyer more value by offering them financing to help with the purchase of the home.
The amount of the non-refundable option deposit is up to the seller. So, sellers can either profit at closing when the home is finally sold, or if the renter backs out of the agreement, you’ve still been collecting rent and you may keep the option deposit.The potential for significant earnings can be great in this respect.
Here are some features and benefits for the landlord/seller:
- Higher sales price, even in a soft market: Like we stated above, more renters who need slow-going financing will be attracted to the home and they will typically pay a premium because of the exclusive financing terms.
- Higher Rent: You can ask for a higher rent payment because you are flexible on your financing terms.
- More Cash Flow: More value = more cash in hand.
- Minimum Risk: The non-refundable option deposit is kept by the seller should the renter default or decide not to buy.
- Don’t always need a real estate agent: Unless the seller lists the rental with an agent which could be helpful to attract attention, the seller is selling the home by owner. This will save on fees and advertising costs in the long run.
- Better tenants: Renting out your home can be stressful because renters can be hard on your home — particularly when they don’t plan to be there long. However, because you are renting to someone who has a longterm interest in your home, there’s a better chance they’ll take care of it.
- Tax benefits of an owner: For the first few years, the seller is still the owner of the home and gets to reap the tax benefits of home ownership.
- Bigger target market: Sellers can target renters AND buyers.
- Less stress: For sellers, this is less stressful than just renting out your home due to the higher quality renters and how much they care about the home.
The benefits to the buyer of renting to own
The benefits of home ownership are many including tax deductions, security, etc. If you don’t have the means to put a down payment on a home right now, but you want your rent payment to actually go toward an investment, renting to own is an excellent option. One of the biggest benefits is the rate at which you accumulate equity. And you could get more home than you may qualify for at this time.
- Equity growth: The buyer’s rent payments will actually go toward an investment — toward equity in a home. Every month a portion of your rent payment is credited towards your down payment or off of the sales price.
- Option deposit is credited to the price of the home: The buyer/renter pays the seller an option deposit like we mentioned above. This money is vested interest in the home and will be fully credited when you buy the home.
- Minimum expenditures out of pocket: When you buy a home, you need a down payment that is at least 3.5% of the purchase price of the home as well as closing costs. Here, you’ll only pay a normal rental security deposit typically plus the option deposit.
- Flexibility in requirements: Restrictions are up to the seller which means there could be more flexibility with credit, etc. You prove your ability to purchase the home by making rent payments every month.
- Control of the Home: The buyer has full control of the home while paying rent. You’ll get to learn the ins and outs of the home, what should be changed and home improvements, etc. before actually owning it.
- No Taxes, Less Liability: Since the buyer does not yet own the home, they do not have to pay property taxes up front, etc. So the buyer has time to prepare for the cost of the home and learn about the total cost of the home while there before they have to take on full responsibility.
- Minimal Maintenance: Typically large maintenance problems or any maintenance problems that exceed a certain amount of money are delegated to the seller.
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