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Rent to Own vs Owner financed Home purchases

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By : Dan Haskett    99 or more times read
Many people are mistaken when it comes to understanding the differences of a rent to own home purchase compared to a purchase using owner financing. Most people believe both terms are identical but they are in fact very different. For example on an owner finance you are actually having the seller owner finance the home to you. Typically when this happens the property is put into your name with a seller lien and terms that pay the loan off in an agreed amount of time with a fixed rate of interest. Your loan payments are the same throughout the course of the loan until it is paid in full.

An owner finance purchase is similar to a bank loaning the money with less stringent criteria as far as qualifying requirements. Down payments are usually in the 3-10% range. Interest rates are usually but not always higher on an owner finance in comparison to what a bank would charge. The credit is usually easier to get with owner finance as they typically have less stringent credit requirements. All of these items are negotiable between buyer and seller and can be whatever they ultimately agree to. Remember as with any contract all terms are negotiable even if the contract is preprinted otherwise.

With a rent to own home the biggest single thing a “buyer” needs to understand is that they DO NOT own the home and simply have the right to buy the home under certain circumstances at a later date. In the meantime the monthly payments are considered rent even though a portion of that “rent” may be credited towards the home purchase price. Usually the “buyer” must put a down payment referred to as an option fee that they will lose if they do not meet the terms of the agreement which is usually to finance the property by qualifying at a bank at some future point. The terms on this type of transaction on average allows the “buyer” 1-5 years to obtain financing and in the interim they are required to pay top market payments (rent) to the seller (landlord).

This gives the buyer/tenant a huge incentive to make payments on time and to take care of the property because at some point they know they will need to show a bank they can afford the property. This also is good for the seller/landlord because it gives the seller/landlord top rent in the meantime not to mention a larger than usual “deposit” that is referred to as an option fee. The “seller” gets to keep this “option fee” whether or not the renter/buyer chooses to or is able to buy at a later date.

Per the terms of the agreement or contract it is usually understood that this option fee will go to the seller/landlord for giving the right to the buyer/tenant the option to buy his property at some later date. The seller also gets to keep the option fee should the buyer/tenant change their mind or is unable to obtain financing at some future date agreed upon by both the seller/landlord and buyer/tenant. The seller knows that as soon as the paperwork is signed he or she can immediately spend that money rather than safe keep it to refund at some later date as they would if they had received a deposit on the property.
Dan Heskett Investor for 25+ years.

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