So you are sick and tired of renting. You want to own your own home, but you don’t have a lot of money for a down payment. You’ve no doubt heard of “the perfect solution”: rent to own. But is it really as perfect as everyone says? Hardly. There are a few secrets about rent-to-own properties that you need to know. They are the most overlooked aspects of a rent-to-own contract. So let’s find out the truth about leasing home ownership.
How rent with option to buy works
Is that how it works. A house for rent with option to buy. You will have a lease that will normally last between 2 and 3 years. The seller will also expect you to make some sort of upfront down payment or option fee. This is usually 1 to 7 percent of the agreed purchase price. In addition to rent, you will pay what is called Rent Premium or Rent Credit. These additional amounts go towards the purchase price of the house.
Let’s see how a rent to own would work in Salt Lake City, Utah. As of January 2017, the median rent for a 3-bedroom, 2-bathroom home in Salt Lake City is $1,500. Now the additional amount you will pay for the purchase is negotiable. Generally, you should expect to pay 20-50% above market rent. For the sake of discussion, let’s go with 25%, which is about average. So you’ll pay $1,500 a month for rent and an additional $375 for purchase. If your lease is for 3 years, you would have a rent credit in the amount of $13,500. Median home value in Salt Lake City is $280,000. If you paid a 3% option fee of $8,400 and combined it with the rental credit, you would end up with a down payment of $21,900 or 7.8%. Nothing bad.
The truth about rent-to-own homes
Want to know the dirty little secret few buyers in your position know? If you decide you can’t or don’t want to buy the house at the end of the lease, you will lose ALL the money you paid. That includes the rental premium and the option fee. Missing. All of it. The seller keeps all the money and you call a moving truck and start over.
You’d be surprised how many times this happens. The buyer may have some problems with the house and wants to get out. Lost money. The buyer may not be able to qualify for a mortgage. Lost money. Or imagine that the seller defaults on the mortgage and the property is foreclosed on. Oh! Lost money.
So, before you compete for the nearest rent-to-own or lease property, be sure to do your due diligence and have the home inspected. Start working with a lender to qualify for a mortgage and, for God’s sake, make sure you love the house.
However, a calculated decision to rent to own a home also has its own benefits.
