In today's economy, rent-to-own property is becoming a popular alternative. In this type of real estate transaction individuals pay monthly rent to the homeowner with the intention of purchasing the property within a specific period of time. A percentage of the rental income is applied to the purchase of the home.
Rent-to-own real estate transactions typically involve renting the property from the homeowner for a period of three to five years. Oftentimes, potential buyers are required to pay the homeowner a down payment of three to five percent of the purchase price. For instance, if the home is valued at $100,000 and you make a down payment of $5,000, the purchase agreement will reflect a purchase price of $95,000.
Next, a percentage of the rental income will be applied to the purchase price of the home. This can range from 5 to 100 percent and will depend on the arrangement you make with the homeowner. It's rare to find a homeowner who will apply 100 percent of the rental income, but it's not impossible. On average, most homeowners apply 25 percent of the rental income to the purchase price.
Let's say you agree to pay $1,000 a month in rent and 25 percent is applied to the purchase price. Each month you rent, $250 will be applied. If you rent for five years, at the end of the agreement you will have accrued $15,000 toward the purchase of the home. At this time, the final purchase price will be $80,000. What this means for you is that you will have $20,000 of equity in the home you are purchasing, making it easier for you to obtain traditional financing at the end of the five year agreement.
Rent-to-own properties can be found in nearly any neighborhood, but before you sign on the dotted line you will want to take precautionary steps to protect yourself. Working with a real estate agent or investor who is well-versed in rent-to-own property transactions will save you time and money. However, many people choose to draft their own agreements with the assistance of a real estate attorney or on their own.
If you decide to draft the transaction on your own make certain every detail is in writing. Include how much down payment is required, what the monthly rental rate will be, the percentage of rent money applied to the purchase price, who will be responsible for maintenance of the property and a clause that allows you to terminate the agreement if the property owner (or you) does not uphold their end of the bargain.
Rent-to-own property deals are a good option for people with less-than-perfect credit. This type of transaction will provide you time to get your finances in order while building equity in the home you wish to purchase.
It is often very hard to find a rent to own home. There is no central database that has all the rent to own homes listed so that you can search for the right home. You have to visit web sites that are hard to find, read through local newspapers weekend after weekend, and then spend hundreds of miles driving to try and find what you are looking for.
Nine times out of ten lease option homes will not be listed in the Multiple Listing Service. Even if they are, agents are reluctant to show them because they have to defer their commission for twelve months or more until the home sells.
Rent to own home owners may not always have the money to advertise in the newspaper, and will often rely on yard signs or word of mouth advertising. So how do you find them? Instead of spending weeks reading through newspaper ads, driving around looking for yard signs and viewing rent to own homes that you can't buy or don't want, you can now have your search done automatically and only the owners that have homes meeting your criteria will contact you. This is especially useful if you are relocating out of state, and don't know which newspapers to read to find these homes.