Rent 2 Own Explained

If you would like to own your own home but are unable to secure conventional financing today, leasing a home with an option to buy may be your best option. A lease purchase (rent to own) can make your rent money work for you instead of making your landlord rich. Typically rent 2 own homes offer rent credits that reduce the final purchase price. Click Here to read about the Benefits for Rent To Own Homes.

Here's how it works:

A home is made available via a standard lease with one important addition. Included is an option to purchase that home at a specified price over a specified time period (usually one or two years). In order to be able to have that option, the tenant/buyer must pay an upfront, NON REFUNDABLE, fee called the option consideration. The exact amount is negotiable, but it is usually ranges from 2.5 to 7% of the purchase price. Most rent 2 own contracts will credit the tenant/buyer 100% of that option consideration toward the purchase price when the tenant buyer purchases the property.

Furthermore a negotiated percentage of all rent payments should be applied toward the purchase price of the home. (The monthly rent credit ranges from 25% to 100% of the rent payment.) Some typical terms and conditions one might expect to find in a contract are as follows:

In order to receive a rent credit, time is of the essence. You MUST pay your rent on or BEFORE the due date of your lease (typically the 1st of the month. This means it must be received (not postmarked) by the lessor (landlord) on or before the due date. Any payment received after the due date will result in a 0% rent credit for that month, a late fee may apply and you will not be building any equity.

Minor maintenance and repair is the responsibility of the Tenant Buyer. You are now renting to own and homeownership requires maintenance. The landlord does not want a call in the middle of the night that you have a leaky faucet or the toilet is clogged up. The landlord expects you to take care of things like broken windows from stones or baseballs, clogged drains, peeling paint, broken appliances, burnt out bulbs, lawn work, etc. If any major repairs are required to ensure habitability, the owner remains responsible.

You will need to give the property owner up front a down payment (Option Consideration). It is a non-refundable payment. Option Consideration is the upfront money you pay the seller that binds the lease purchase contract and locks in the purchase price for 1 to 2 years. It is typically equal to 2.5% to 7% of the purchase price of the home. 100% of Option money is credited toward the purchase price.

Here's an example transaction:

We have a nice 3 bedroom, 2.5 bath townhome located in Spring Valley, a near suburb of San Diego in a great neighborhood with good schools and a strong community. It has been freshly painted, cleaned, and is ready to move in.

The purchase price will be $377,000. Monthly rent payments will be $1,497 and you will receive a 50% rent credit ($750 per month) toward the purchase price if you pay your rent on time and take care of the minor maintenance and repair of the property. You will need between 2.5% and 7% in up front Option Consideration.

Let's say your budget allows for $10,000 for Option Consideration. This equates to approximately 2.7% ($10,000/377,000). You will also need $1,497 for the first months rent plus a $500 security deposit for a total initial payment of $11,997.

Please note: Option consideration is not a security deposit. It is a non-refundable payment toward the purchase price and is 100% credited toward reducing the price of the home.

Now suppose you paid all your monthly rent payments on or before the due date and you choose to buy the rent 2 own home at the end of the 12 month lease option contract. You will have $19,000 in equity before you even own the home! Here's the math:

Lease Purchase Price - $377,000

Less: Option Consideration paid at lease signing - $10,000

Less: 50% rent credit of $750/m * 12 months - $9,000

Net Purchase Price after credits - $358,000

You started with $10,000 and by paying your rent on time; your equity position grew nearly 90% (another $9,000) for a total of $19,000 within 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.

What's the catch?

Now you may be thinking, "OK, what's the catch? This sounds too good to be true."

Answer, there is no catch.

There are many possible reasons a landlord/seller may want to enter into a rent to own agreement. Some reasons may be:

1. Needs to maintain ownership for at least one year for tax purposes.

2. Unable to get a fair price due to local conditions.

3. Tired of performing minor maintenance.

4. Furthermore, when one sells a home through a realty service, a commission of 5-7% is typically paid. In the example above, this would cost more than the rent credit. Since realtors are usually not involved with this type of transaction, there is no commission and the landlord can afford to pass along the savings to the tenant/buyer in the form of rent credits.

Also, when the Tenant becomes the Tenant Buyer (via rent 2 own), there is an immediate sense of pride in ownership. Tenant Buyers add value to the community. They take care of their future property, make improvements, and feel good knowing their rent money is working for them (reducing the purchase price) rather than just making their Landlord rich.

And it only makes sense to maintain and/or improve the property because you know that after a year or two you will have to re-finance the property to cash the landlord/seller out and you know the lender will loan you more money if the property is in good condition.

There are many advantages for the renter:

1. Build equity toward home ownership.

2. No bank or finance company involvement.

3. Poor credit history may not be an issue

4. Many lenders will provide the tenant buyer with a refinance loan rather than a purchase money loan which means if the property has appreciated in value during the lease option term the lender may not ask for additional down payment.