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What Is Rent-To-Own Housing And How Does It Work?

The rent-to-own scheme is one of the most popular strategies house buyers use to own a property. It’s also a tactic employed by real estate investors who are on a budget. Yet, there are some pitfalls to this scheme like having your money forfeited. There are also benefits such as being able to test the property first and purchasing it with a locked price.

But what really is rent-to-own housing? How does it work? And what are the processes a tenant must go through to be the owner of their rented property? Read on to discover the answers.

The Basics Of Rent-To-Own Housing

Rent-to-own housing is a type of homeownership where a tenant pays a fixed rent and eventually owns the house when their length of stay reaches a specific time. After the lease has ended, the tenant will then have the option to buy the property or not.

Pros For Buyers

1. You can own property with a bad credit

Lenders like banks require you to have a good credit score to approve your housing loan or mortgage. Landlords don’t usually require these kinds of documentation. What matters is that you’re able to pay your rent on time with the right amount as agreed on the lease.

2. You’ll experience living on the property first

The problem with buying a house upfront is that you won’t see the underlying problems in it. For house buyers that don’t do their research first, this is a common mistake with consequences. But through a rent-to-own scheme, you’re able to do a test drive on what it's like to live on the property and might discover it’s in a bad neighborhood.

3. Locked-in purchase price

Real estate markets may be less volatile but properties are not exempted to changes in value. However, you’ll still pay for the property with the amount agreed on the lease even if its value on the market will increase exponentially.

Cons For Buyers

1. The deal and your money can be forfeited

If your landlord doesn’t pay the property’s mortgage, it could be foreclosed. Both the contract you agreed on and your extra payments will be forfeited with a low chance of refund. Another worst-case scenario is that the landlord has neglected to pay property taxes and has left you with liens as the new owner.

Although these problems can be settled through legal means, they’re still a headache for the buyer/tenant.

2. You have less control

Even if you buy the property in the future, the landlord will still be the owner until then. You can’t make any renovation or changes to the property. Doing so will only let you incur costly penalties.

3. Slow house buying process

You’re always at the mercy of the landlord. You cannot speed up the rent-to-own process if they won’t agree with you. The property might hit an all-time high of its value and you can’t sell it during such a period because you’re not the owner.

The Rent-To-Own Home Process

1. Discussion

The first step to the rent-to-own process is that both the tenant and landlord have to discuss their terms such as the additional rent price, duration of the lease, after-lease option fees, maintenance, and repairs.

2. Lease signing and stay

After that, they legalize the agreement by signing a document in the form of a lease. The document will also be reviewed by a legal professional. During the tenant’s stay, they must pay the right amount of rent and on time as agreed. They’re also obligated to care for the property.

3. The tenant’s final decision

When the lease is over, the tenant is either obligated to buy the property or has the option not to. This depends on what the landlord and tenant agreed on at the end of the lease. If the tenant chooses to purchase the property, they can use the additional amount from the rent as a downpayment. If not, the landlord takes the sum of the additional rent payments.

Renting a house for ownership is tricky if you don’t know the landlord well. Make sure you set your own terms and read the landlord’s terms as well. Don’t sign the lease if there are loopholes that the landlord can use to cancel your contract and get away with your money.

There are more articles here at Landlord Prep™ waiting to be read by you. Here are some of them!