Rent to own is an agreement that allows the tenant to buy the property after renting. They have to do this at a specified time, which is stated in the contract.
But why do people opt for rent to own? People who opt for this contract are those who want to buy some time to save money for the down payment. This also gives them time to repair their credit so that they will be approved of better mortgage deals. Others opt for a rent to own when they want to experience the whole neighborhood before they opt to make the purchase.
Rent to own has its own advantages. Most of the time, it is on the part of the landlord. But tenants have their own benefits too. They get a chance to live on their dream home and buy it at a time when they are ready.
However, rent to own is not as easy as it sounds. One must be able to understand the provisions involved in a rent to own contract, to make sure that he or she would not end up wasting his or her down payments.
Here's an overview of how rent to own contract works:
The contract is just like any other rental agreements but with provisions for sale. The usual roles and responsibilities of the tenant and the landlord are reflected on the document. However, you will encounter terms like option periods, option fee, selling price and terms of sale.
The option fee is the amount that you pay for availing the opportunity to purchase the house. It amounts from 1% to 5% for the purchase price. This fee is not merely a payment but it will in fact take part of your down payment for purchase.
There is also a rent premium. This is like your usual rent but the price is slightly higher than the set market value for the property. This is set this way because a portion of what was paid will also be included in the down payment.
When the tenant starts paying any of this, he or she should pay them religiously until the option period. If the tenant happened to breach the contract or should decide not to exercise the purchase option, the seller is not obliged to return the payment. The tenant would then lose all the payments he or she makes.
Option period may vary. The longer the option period the more equity the tenant builds. However, sellers would naturally want an option period that is shorter so that the house would sell the soonest.
Rent to own has its own advantages and disadvantages. For one, the tenant can easily save money for the down payment through the rent premium and option fee. He or she should also repair credit until qualified for a good mortgage rate. Hence, every tenant should read the terms and conditions of the contract.
This kind of agreement may be fully advantageous to the seller. Hence, one should be committed to making the payments so as not to be on the losing end.
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