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Rent-to-Own has Advantages and Disadvantages for Buyers and Sellers

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By : marco benavides    99 or more times read
In real estate, rent-to-own is an agreement made up of a lease or rental and an option for purchase agreement. At the end of a set period of time, generally three years or less, the renter/buyer has the option of purchasing the rental property for a previously agreed upon price. Rent-to-own agreements include a rent premium and an option fee that are applied toward the purchase price at the end of the rental agreement.

Buyers can choose not to buy the home, but the disadvantage would be losing out on the option fee and any money paid as a rental premium. If a buyer were to back out of a rent-to-own agreement, the disadvantage to sellers would be that they may end up with a property they were trying to get rid of in the first place. If there is a mortgage on the property they no longer want, they have to bear payments until they can either sell the property or find another tenant willing to enter into an rent-to-own agreement.

If the property goes up in value during the time of the rent-to-own agreement, the seller cannot raise price of the home. The seller cannot sell the home to another potential buyer, even if a better offer is made on the property. These are distinct disadvantages that sellers must examine. Buyer/renters have the disadvantage of not being able to offer less for the home if the value of the home goes down during the rent-to-own agreement. Once the contract is signed, it is binding during the period of time that is agreed to by both parties.

Sellers have the advantage of receiving money for a property they no longer want. The money they receive could be applied toward the mortgage on a new home or the mortgage on the old home. Either way, sellers benefit from the extra income generated during the rent-to-own agreement. Buyer/renters have the advantage of being able to repair their credit if they have a poor credit history and even build up a down payment for the home.

Another advantage for sellers is that they can generally find good tenants through rent-to-own contracts. Tenants are more likely to take care of a property if there is a possible purchase at the end of the rental agreement. Renter/buyers have the advantage of being able to lock in the purchase price and the rent amount at the time the agreement is signed. Should the house appreciate during the time of the agreement, it is a definite benefit for the renter buyer. Another benefit accompanying is that the rent will not be raised during the period of the agreement if rental prices should begin to climb.

Both landlords and tenants should be knowledgeable about what is involved in rent-to-own agreements. This way they can both go to the bargaining table to try to hammer out a beneficial agreement. The rent-to-own agreement should not be weighted toward only one party because this would only ensure a bad end. Tenants would end up losing thousands of dollars and landlords would get stuck with a property that is unwanted. In order to avoid this, both parties should see benefits from the agreement and potential disadvantages should not only affect one party.

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