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6 January 2010

The “Rent to Own” and “Lease Option” Alternatives for Homebuyers

If you desire to own your own home, but are unable to secure conventional financing today, you may want to consider houses for rent with an option to buy, using a lease option contract. It can make your rent money work for you. Typically, many rent-to-own homes offer generous monthly rent credits that reduce the final purchase price! While homes for sale and for rent are abundant, few owners of these types of real estate properties realize the numerous advantages of the rent to own or lease/purchase option strategy.

There are basically three ways to find a home that fits your needs and negotiate terms with the Seller or Landlord of the property. Execute a contract that is a lease with an option to buy the home at some point in the future. Work within your budget to create a lease option contract that works best for you, or negotiate a lease-purchase.

Rent to Own

Rent-to-own homes provide buyers-tenants and sellers-landlords additional options during questionable times for the market or the individual parties. The general agreement allows for a potential buyer, who may not have the capital to buy the house out-right or the credit to get a loan, to pay a deposit up-front, traditional rent and a rent premium and live in the desired home immediately.

The deposit on a rent-to-own is usually between one and five percent of the property price. The traditional rent goes straight to the seller-landlord, as in any other rental agreement. The rent premium acts as a further deposit toward the purchase of the house. Most rent-to-own contracts are fairly short term – one to three years is the usual length – and the price of the property is usually determined by a professional appraisal at the time of contract signing.

Lease Option

A lease option allows the buyer-tenant to work towards the purchase of the house without an obligation to buy. This arrangement provides the buyer-tenant 12 to 36 months to save money or raise a credit score that is slightly below the needed one. A lease option also reduces the potential buyer’s anxiety about making the long-term commitment of purchasing a home and provides them time to further consider the pros, cons and responsibilities of home ownership. At the same time, a lease option agreement gives the seller-landlord more security than with a traditional renter. The tenant can ultimately decide not to by the home, but he or she usually forfeits the original deposit and the rent premiums paid every month.

Example Lease-Option transaction:

  • Purchase price of the home is determined to be $215,000
  • Monthly rent payments will be $1,500
  • You will receive a 50{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} rent credit ($750 per month).
  • You need between 2.5{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} and 7{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} in up front Option Consideration. Let’s say your budget allows for $6,000 for Option Consideration. This equates to approximately 2.8{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} ($6,000/215,000). You will also need $1,500 for the first months rent for a total initial payment of $7,500.

[Please note: Option consideration is not a security deposit. It is a non refundable payment toward the purchase price and is 100{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} credited toward reducing the price of the home.]

Suppose you paid all your monthly rent payments on or before the due date and you choose to buy the rent to own home at the end of the 12 month lease purchase contract. You will have $15,000 in equity before you even own the home! Here’s the math:

LeaseOption

You started with $6,000 and by paying your rent on time your equity position grew 150{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} (another $9,000) for a total of $15,000 with 12 months. Not a bad deal! Many people find it nearly impossible to save $9,000 in a year with all the costs of living constantly on the rise.

7 thoughts on “The “Rent to Own” and “Lease Option” Alternatives for Homebuyers

  1. Rent to own is home buyer friendly option, its like renting an apartment but you'll acquire ownership in a period of time depending on the plan and monthly premium of your home. I think this is an economical option for those you can't purchase homes in cash coz you don't need to pay interest once you find yourself in trouble paying the monthly premium, you can just leave and find another place to live.

    1. Glad that you like the idea. Rent to Own stikes a very fair balance between buyers, who wish to buy but lack the cash for a downpayment…and sellers, who are having difficulty finding a qualified buyer for their home.

  2. Tyler, Thank you for your comment.

    Really, the situation is only limited by our ability to be creative. Any contractual arrangement which could be designed as a "win-win" could work. It just seems to me that the real estate community needs to incorporate some of these more progressive concepts.

  3. A couple things,
    1. The only payment that the NEW lender will allow to be applied toward the down payment is that amount above fair market rent.

    2. There is an obscure FHA guideline that allows tenants to purchase the home that they have been renting and not have to come up with cash. (my fha guru lender explained it to me, please don't ask me to explain it)

    This is really good for owners that have a tenant and don't wan the property anymore.

    Think about it, look in your database for rented properties, facilitate the transaction, never leave the office and get paid.

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