I have had a number of friends and people ask me for advice and what options they have when they are looking to purchase their first home. If you’re like most home buyers, you’ll need a mortgage to finance the purchase of a new house.
To qualify, you must have a good credit score and cash for a down payment. Without these, the traditional route to home ownership may not be an option.
There is an alternative, however: a lease to purchase agreement, in which you rent a home for a certain amount of time, with the option to buy it before the lease expires.
Rent-to-own agreements consist of two parts: a standard lease agreement and an option to buy. I know my topic says Zillow lease to own homes but i will tell you about other places to find these rent to own homes.
What is lease to purchase?
A Lease-Purchase Contract, also known as a Lease Purchase Agreement, is the heart of rent-to-own properties. It combines elements of a traditional rental agreement with an exclusive right of first refusal option for later purchase on the home.
It is a shortened name for Lease with Option to Purchase Contract.
Lease-purchase contract agreements are open source in nature and flexible to the needs of the tenant/buyer and landlord/seller.
Lease-purchase contracts are popular with tenant/buyers who have poor credit scores, lower savings for down payments, or people who are moving from one city to another but are pending a sale on their previous home.
They are great for sellers who are having difficulty securing tenants for their properties, which can be common when a house is for sale.
In the United States, when credits are applied to a purchase price the agreement becomes a financing contract and these contracts have been identified as predatory lending arrangements under the Dodd-Frank Act.
Under this federal law any financing arrangement requires the purchaser of an owner occupied dwelling (one to four living units) is to qualify for any financing contract with a registered Mortgage Loan Originator.
There are exemptions under this federal law for homeowners financing their primary residence, those in the business of real estate such as landlords are considered dealers.
In all states, rent to own arrangements are no longer compliant with federal financing requirements.
Commercial loan arrangements are exempt from the Dodd-Frank Act, as a landlord might rent to own a property for the purpose of sub-letting to a tenant. This arrangement is not a popular arrangement but may be accomplished legally.
Lease-purchase contracts are not for everyone. As successful completion of the agreement and sale transaction requires financing through a traditional route, people whose circumstances will not allow them to receive a mortgage should abstain from rent-to-own real estate agreements.
Do I need a lease to purchase option?
If you are looking to get a lease to purchase option which is also known as rent to own these are the things you have to keep in mind:
1. You’ll pay more in rent every month than you would as a renter
Let’s face it — landlords aren’t going to credit a portion of your monthly rent toward the purchase of the house out of the goodness of their hearts. They’ll expect something in return.
This “catch” is usually more per month in rent than you’d pay in a simple rental arrangement. And not all of that “extra” you’re paying each month is going toward your purchase credit.
For example, let’s say the standard rent for a property is $1,700 a month, but the landlord is offering a rent-to-own deal for $2,000 a month. Don’t expect to be credited for the whole $300 extra you’re paying each month.
In the fine print of this deal, it could turn out that you’ll be credited just $200 of that $300 each month. So, in reality, you’re paying this landlord $100 simply to “save” money for you.
Plus, that extra that the landlord is “saving” for you every month might not be doing anything to help you purchase the house down the road, like building a nest egg to use as a down payment.
“Rent-to-own doesn’t eliminate the down payment. The portion of your rent is just going toward the price of the house. You’ll still need a down payment when it comes time to get a mortgage,” explains Dang.
2. You’re paying less toward the price of the house than you’d think
Putting several hundred dollars a month toward the purchase of a house before you can actually afford a mortgage sounds like a smart financial move on the surface.
But when you run the numbers, you’ll see that the sum total of the credit doesn’t actually amount to much, even in the long run.
“It’s just like leasing a car. If you actually pay off and purchase a leased car, you’ve paid a lot more than if you’d simply purchased the car outright,” explains Dang.
Let’s say you’re paying $2,000 a month in a rent-to-own deal on a $400,000 home — and the landlord agrees to put $200 a month (or 10% of your rent) toward the price of the house.
That’s only $2,400 in one year.
In five years (the maximum of most lease-purchase agreements), that’s a total of only $12,000 that’ll be credited against the agreed-on purchase price.
And you could pay that much just to get into the deal in the first place, because…
3. Most rent-to-own contracts require a nonrefundable upfront fee
Sure, renters expect to pay fees to lease an apartment or house for things like security deposits and application fees — sometimes as much as two-months’ rent.
But if you’re opting for a rent-to-own deal, expect to feel a little sticker shock.
Most lease-purchase agreements require an upfront, nonrefundable, one-time fee that’s calculated by the home valuation. While the amount is negotiable, it’s typically between 2.5% to 7% of the agreed-upon purchase price.
Do the math, and you’ll see that you’re paying anywhere from $10,000 to $28,000 (on a $400,000 house) just to get into the rent-to-own deal.
That may be around the same or double what you’ll pay again in closing costs when you eventually get a mortgage on the house.
For example, if you get a 30-year, fixed-rate mortgage for $380,000 (after making a $20,000 or 5% down payment on that $400,000 home), you’ll pay around $12,000 in closing costs in Phoenix, AZ, according to Bank of America’s closing costs calculator.
Alternatively, you could save the upfront fees you’ll pay on a rent-to-own deal, put that money in a savings account — or better yet, a mutual fund — and let it earn interest so you can afford to purchase a home sooner than you could in a rent-to-own deal.
4. You may lock in at a bad valuation
Like the price of gas, home values are constantly fluctuating. Sure, it’s true that, historically, home values increase over time because it’s an appreciating asset
However, in the short term, list prices rise and fall by thousands of dollars within the span of weeks or months.
That can be a problem with the rent-to-own because most lease-purchase contracts state the agreed-upon sales price of the home in the contract. In other words, you’re locking in the price of the home one to five years before you buy it.
“It is possible for a rent-to-own contract to just set a purchase price range, but typically, you’re negotiating and locking in the price of the house long before you actually buy it,” explains Dang.
“If the property value has decreased when it comes time to purchase the house, the tenant is still locked in to pay the higher price.”
If the home value does decrease below the agreed-on purchase price, be prepared to lose the money you earned as a credit toward the purchase price. No bank is going to sign off on a mortgage for more money than the house is actually worth. So, unless you’re able to cover the difference, you won’t be able to purchase the property when your rent-to-own contract is up.
How Do You Find A rent To Own Home?
Rent to own home listings aren’t as common as either rental or sale listings, because they often happen under very specific circumstances, such as: When a property owner has had a home on the market for a while, but is having trouble selling it, they may list it as a rental with an option to rent to own. If a tenant is happy in their rental home, but the landlord wants to sell it, the tenant may ask to have a rent to own arrangement. If a home buyer sees that a home has been on the market for a long time, they may approach the seller with a rent to own offer.
If a rent to own home sounds like a good option for you, you can either look for rental listings that include this option or longstanding sale listings that don’t seem to be going anywhere. Or you can ask your landlord if they’re open to discussing a change in your relationship with a rent to own agreement.
You Need To Know
Rent to own like any other purchasing method has its advatages or disadvantages , if you want to buy a house but you cannot secure other traditional methods of financing you can look into rent to own here
Feel free to engage me in the comment section if you would like advice on this topic