Entering into a "Rent to own" or "Lease Option" contract basically means you're renting a home just like any other rental. However, as part of the contract you have the option to buy the home at the end of the lease for a predetermined price. Renters are required to pay an option fee to the seller (which is a set amount that will be applied to the down payment when the home is actually purchased by the tenant.) A portion of the tenant's monthly rent will also be applied towards their principal balance.
For example, if a home is worth $100,000.00 and rent is $800/month, then the seller may
Renting to own can appeal to people with little to no savings for a down payment, or people with bad credit or no credit. It is also an option for those who do not qualify for traditional mortgages or may have lost their homes to foreclosures. It can be a great way to get into a desired neighborhood or school district in a timely manner, while affording the renter time to build their income or repair their credit.
Some points to consider before entering into a rent to own contract...
1) All terms are negotiable. Be sure that the purchase price of the home agrees with the current value of the home. It is likely that the option fee will be 3% - 5% of the agreed upon purchase price.
2) Most rent to own contracts will require the renter to purchase the home in 1 -2 years. Many contracts will extend another year to the renter with a 4% escalation (this percentage could be higher or lower) on the original agreed upon purchase price of the home.
3) A renter can walk away from the purchase at the conclusion of the lease, but they will lose their down payment.
4) Most rent to own contracts state the the tenant is responsible for all repairs needed (even throughout the rental period).
5) Make sure that all terms are understood and agreed upon before signing a contract.