A rent-to-own strategy is a unique type of agreement for sale, where the buyer has an option to purchase the property at a later date (usually after three years) for a predetermined price, regardless of an increase in value. This type of financing is very beneficial for both buyer and seller, but does have its advantages and disadvantages.
For the seller, an unoccupied home is foregone revenue, and an increased burden to cover the mortgage payments. When a buyer has issues with the credit bureau or access to adequate funding, the rent-to-own structure allows for a slightly higher than average rent to be paid to the seller, with the difference being contributed towards the downpayment. When the homeowner is eager to sell the property, and there has been a lack of interest, this is an option that is available but often overlooked.
How does rent-to-own work?
Before the buyer and seller enter into an agreement, there has to be a negotiation for a finalized sale price and rental amount. The option term is initially between one to three years, but can be extended under a new option agreement, however there is always the risk of unpredictable market trends that may affect both parties.
There are two types of fees involved with rent-to-own; an option fee and a rent premium. Both fees form part of the downpayment, should the buyer complete the property purchase. If at the end of the term the sale isn’t completed, the fees or ‘credits’ are kept by the seller. An option fee is a fixed amount agreed on at the beginning of the term, and a rent premium is an additional amount over the typical or average rent determined by current market conditions for the specific property.
With rent-to-own, the seller benefits from both rental income to carry the mortgage, and excess income should the deal fall through. The buyer benefits from being able to acquire a property even with inadequate financing ability and limited investment capital.