(DailyAnswer.org) – If you look at the newspaper or online real estate ads, or perhaps drive or walk around neighborhoods with an eye out for ‘For Sale’ signs, no doubt you’ve also frequently come across ‘Rent to Own’ notifications.
The rent-to-own option makes a lot of sense for those experiencing difficulties securing conventional financing. Additionally, some families like renting a home for a substantial amount of time to see if they feel comfortable with the house and the neighborhood.
Rent-to-Own Programs
In a rent-to-own agreement, the renter pays more monthly rent than the market value. The extra rent paid goes into a type of escrow account. If the renter agrees to buy the home after a few years, the extra money will go toward a down payment.
Sometimes, you must also pay an option fee of between two and seven percent of the home’s market value to secure the right to purchase the house at the end of your leasing period.
Types of Rent-to-Own Programs
The two main rent-to-own options include the lease option and the lease purchase. The two types allow the renter to lease the home for one to three years before purchasing it. There are a couple of contractual differences that you should understand before getting into an official agreement.
Lease-Option
- The renter must sign an option fee of two to three percent of the home’s market value when you start renting the property.
- The extra money paid for rent will go toward your down payment if you decide to purchase the home.
- You are not required to purchase the house at the end of the lease, but you will lose the money in the rent credit account.
- You may work with the seller to negotiate a fair price which may involve an appraisal.
Lease-Purchase Agreement
- A portion of your rent goes toward your down payment.
- You are obligated to purchase the home at the designated time, usually between one and three years.
- You and the seller agree on the price at the time of the initial agreement.
Pros of Rent-to-Own Programs
Both types of rent-to-own programs come with benefits. Whether you sign a lease option or lease agreement, you’ll reside in a home you love while saving money for a down payment.
During the time that you rent the property, the owner usually splits repair costs with you.
In a lease option, if you find the home has too many problems or you don’t like the neighborhood or the schools, you may opt out of the contract. With the lease option, you also negotiate a fair price depending on where the housing market stands.
In a lease agreement, you know the mortgage’s exact price and the down payment amount. You don’t need to worry about the owner pulling out of the contract.
Cons of Rent-to-Own Programs
Whether you sign a lease option or lease agreement, you still need to qualify for a mortgage or financing at the end of the rental period.
You will lose all the money in the rental down payment account and your option fee if you decide not to buy or don’t qualify for financing.
While renting the home, limits exist as to what you may do regarding cosmetic changes and decorating. Remember, some rent-to-own contracts require you to pay for all repairs while decorating.
Making it Your Own
For many people, if you’re renting a home you intend to purchase, you want to put your personal touch on it and make upgrades and improvements. But when technically renting the property, definite dos and don’ts exist. Review the points below before you go on a rental home improvement whirlwind.
What You Can’t Do:
- Paint or significantly otherwise change the exterior
- Replace fixtures or appliances
- Drill countless holes into the walls
- Apply wallpaper
- Put in new flooring
What You Can Do to Make Your Rental a Home:
- Upgrade your window treatments
- Accessorize with pillows and other art pieces
- Decorate the walls safely with removable hooks
- Replace light fixtures
- Add area rugs
If you replace something like a fixture, if it’s possible to exchange it for the original if you move, it probably represents a safe home improvement option for a renter.
When it comes to outdoors, unless the owner or landlord gives you the go-ahead, you may want to stick to container gardening or, at the very least, planting annuals.
Rent-to-own contracts make sense for many people. Just make sure you understand the terms and that you’re ready to pursue the purchase at the end of the rental period.
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