Rent to own sounds like a great idea, but how much do you understand about how it works? Using the rent to own process as a way to invest in a home can be beneficial for some individuals but financial ruin for others. Carefully examining your motivation and goals before taking the leap will serve you well in the long run. Join us below as we take a look at what these contracts mean plus the pros and cons of rent to own properties.
What are Rent to Own Agreements
These contractual agreements will each have different terms and specific clauses, so read carefully. Making a decision, thoroughly research all options as well as the pros and cons of rent to own. Make sure the contract aligns with your long term goals. When discussing rent to own, there are two main types.
- Rent to Own Agreements: This type allows a tenant the opportunity to buy the property after a specified amount of time before the lease ends. In the meantime, they reside in the property as a tenant. Occupants pay rent throughout the tenancy, and depending on the contract, a percentage of the payment applies to the purchase price.
- Lease-Purchase Agreement: A purchase agreement means the tenant must purchase the property at the end of the lease, whether they want or can afford it or not. Be aware that these agreements contain a lot of terms and “catches” for the buyer. Carefully read and negotiate before entering into a lease-purchase agreement.
Potential Risks for Rent-to-Own Buyers
Every transaction in real estate comes with some level of risk. Weighing those pitfalls against the benefits will lead you to the right decision for your goals. Rent to own transactions can get particularly complicated. So, do your due diligence to avoid any unwanted surprises and consider these risks below.
- Hidden Issues: A house may look great on the outside but be hiding significant issues on the inside. Treat rent to own agreements just like a traditional home purchase. Invest in an inspection and title search before signing any contracts. This protects you as the buyer form issues arising down the road.
- Diminished Value: Throughout your agreement, the housing market can fluctuate. If prices fall, you will have a difficult time trying to negotiate a lower purchase price. So, if that happens, you can either get out of the agreement and lose your money or buy the house anyway. Both of those options can be tricky.
- Lost Money: Generally, you are paying additional money per month for rent to own than for a traditional rental. Therefore, if you do not follow through with purchasing the property, you will have lost that money.
- Less Control: You may have an agreement, but you have not purchased the property yet. That means the landlord still has a great deal of control. If they fail to make the mortgage payments or the home is foreclosed, you may have little recourse. Also, you may not be a part of significant maintenance or property decisions. To avoid this scenario, your agreement should clearly outline these issues.
- Beware of Late Payments: Agreements will vary on the stance regarding late payments, but generally, they are detrimental. In some cases, late payments can result in a loss of the right to purchase the property. Check out your agreement terms carefully and always plan to pay on time to avoid potential issues.
Why is Rent to Own a Good Idea?
Risk is inevitable; however, with such a variety of risk factors, why purchase this way? Well, there are also some notable benefits to this type of transaction if you know what to look for. Check out some of the upsides below.
- Home Test Drive: Imagine knowing about those nightmare neighbors before you bought the place. Well, when you rent to own, you get to live in the property before purchasing. This gives you a better overall look into potential issues with the home or neighborhood.
- Credit Under Construction: If you are unable to qualify for a home loan due to credit issues, rent to own may be a solution. This allows you time to rebuild and work on your credit score before purchasing the property.
- Lock Down the Price: A savvy buyer in an up and coming market can lock in a favorable purchase price even if the transaction is years away. This goes both ways, though, and prices may fall, so choose wisely and research local markets before committing.
- Built-in Savings: Payments made under a rent to own agreement add up over time. That means at the end of the contract; you can have a sizeable amount to put towards the purchase of the home. This large down payment may also make it easier to secure a bank loan.
How to Find Rent to Own Properties
You have weighed the pros and cons of rent to own, and you want to see what’s out there, but where do you look? Technology has made the home search a convenient process right at your fingertips. Check out these tried and true methods for finding your next rent to own opportunity.
- Reach Out to an Agent: Working with a licensed agent has many immeasurable benefits. Not only do they have access to a wide variety of search tools, but their experience in these transactions can prove invaluable.
- Seek Out Rent to Own Programs Through a Brokerage: These firms work with both you and licensed agents to find rent to own opportunities. Again, they will have far greater search capabilities than an individual going it alone. Utilizing established rent to own programs also helps to reduce potential risks.
- Contact Sellers: Through your agent, reach out to homes you may be interested in that have stagnated on the market. If the owner has had trouble selling and is looking for alternatives, rent to own may be appealing to them. It never hurts to ask!
- Search Online Portals: Just as you would search for a traditional home purchase, there are sites dedicated to rent to own properties. Scroll through these to get an idea of what is available in your local area. A few great examples of online portals are:
Top Search Portals for Rent to Own Property
So, is rent to own right for you? The best way to determine the answer is to examine the pros and cons of rent to own along with all other options available to you. Are you interested in a rent to own as an investment strategy or need help managing your current portfolio? Lucky for you, there are real estate property managers ready to help. Contact Bay Property Management Group Prince Georges County today!