Raising the Appraisal Value
When you agree to rent to own a property, you and the seller might choose to set a purchase price on the day that you sign the lease, but there’s no guarantee it will appraise for that much.
Hopefully, you used market trends to make the best possible prediction of what the home will be worth at the end of the lease term. However, no matter how factually backed your prediction is, you are speculating.
When you speculate, there is always a possibility that you will be incorrect. So, what do you do when the lease term ends and the price you and the owner set is way higher than what the home is worth?
When the Purchase Price is Higher Than the Appraisal Value
Mortgage lenders are unlikely to approve your mortgage when the set purchase price is higher than the appraisal value. When a bank gives a mortgage, the home serves as collateral in case you don’t pay the mortgage. If you owe the bank more than the house is worth, the house is no longer adequate collateral, and the bank’s investment wouldn’t be secure.
If you’re not approved for a mortgage and you don’t find another way to get the money, then you cannot purchase the house you lease-optioned. When you don’t purchase a home that you lease-option, the seller has the right to keep your option fee and any premium payments you made.
What Can You Do to Avoid the Situation
Sometimes, your option fee and your premium payments can be too much to walk away from. There is another way to bring up the house’s value, but it is financially risky for you.
When you make improvements to a property, you can increase the value of the property. These improvements can be changes like upgrading the bathrooms or the kitchen and/or installing a new roof or A/C unit. A bigger change that you can make is installing a pool in the backyard.
Making the Decision to Upgrade
The seller should not have an issue with you upgrading things. If you cannot buy the home for the value that you agreed upon, chances are other people cannot either.
If you walk away from the lease-option, they’ll end up having to sell the property to someone else for what the home is actually worth. Your improvements will increase what the home is worth regardless of whether you’re able to buy it. Should your improvements be successful at raising the appraised value high enough, they get to sell the home for the price they wanted and you covered the costs of the upgrades.
The risk of choosing to upgrade to reach appraisal value is that if your property still doesn’t appraise. Should that happen, not only will you lose your option fee, but you also the money you spent making these improvements.
If these are upgrades you wanted to make once you owned the home, they may not be a bad idea to do. Nonetheless, if you’re short on money, it might be a better decision to take the loss of the option fee and premium payment and walk away from the rent to own deal.
When you’re trying to figure out if your upgrades will be enough to change the appraisal value, look around at homes that have sold in your area. Compare homes with the same amount of bedrooms and bathrooms. Then, compare the ones with old vs new kitchens, bathrooms, A/C units and roofs. Compare the homes with pools vs without.
What to Do
Ultimately, it’s important to make sure that the upgrades will change the value of the property enough for the house to appraise. It’s most important that these upgrades don’t affect how much money you’re able to put into the down payment of your home or your credit score because the appraisal is just one aspect of qualifying for a mortgage. There’s a lot more that goes into it too.