10 things you should know about rent to own.

Rent to own

Rent to ownRent to own is not really widespread yet, but it’s slowly gaining some popularity.

Here’s how it works:

The landlord rents the home or condo with the standard rental contract. For an extra payment, the tenant receives an option to buy the home at a later date, for a set price. Let’s say the home is worth $250,000. The parties agree the tenant will have the right, but not the obligation, to buy the house in three years for $280,000.

The fee for this right, or option, is usually 2 or 2 ½ per cent of the final price. In this example, 2 percent of $280,000 would be $5,600. Then, each month, the tenant pays an extra fee, say $200, that also is applied to this option price. At the end of the three-year lease term, the tenant has put up close to 5% towards the purchase price option. In this example, it would be close to $13,000.

If the tenant exercises their right to buy, they can use the $13,000 as the down payment and apply for a mortgage to finance the rest of the purchase.

The advantages for the tenant:

•You may not have the down payment now, but you will have it at the end of your lease, as a result of the additional payments;

•If your credit is not good, you can improve it by making timely payments of rent;

•You can try out the neighbourhood and if you change your mind later, you can just cancel the option;

•If the market price of this home is more than $280,000 at the end of your lease, you still get to buy it for the same $280,000.

•If the market collapses and the home is worth less than $280,000, you do not have to go through with your purchase.

Some disadvantages of Rent to Own:

•There is no guarantee that a bank will give you your financing when you exercise your option. You still have to improve your credit score or find someone to co-sign your application;

•If you don’t go ahead with your purchase, you usually have to forfeit the option payment.

Some advantages for the landlord:

•Tenants on rent-to-own typically take better care of the property, thinking that they may own it one day;

•Your profit is fixed at the time of the option.

As a Realtor, I think homebuyers can do better. The best way to buy a house is to establish credit and have the down payment ready. After that, everything else is just a gimmick and a scam.

If you have any questions or comments, please email me.

You may also be interested in my 365 Rules about Real Estate


Please call 519.729.4116 or email keith@kwhomesandhouses.com with your comments or questions.

Source: The pros and cons of rent to own


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