Hearing from people who have participated in rent to own may leave you wondering if you should try it. You have probably heard about success and failures from your family and friends. Of course, you want to end up on the side of success, but you are not sure what conditions draw the line between the two. There are benefits to rent to own that can help you reach a success.
Who Benefits from Rent to Own
Both the buyer and the seller benefit from rent to own. The rent to own buyer benefits from property appreciation, time, mortgage rates and flexibility. The rent to own seller benefits from a committed and incentivized buyer, steady cash flow and a way out of a slow market.
Those who know the benefits of rent to own, find the right time to begin renting to own. They're better able to avoid falling for classic rent to own scams too.
Rent to Own Benefits for the Buyer
For the buyer, the benefits of rent to own are property appreciation, time, mortgage rates and flexibility. Rent to own gives buyers the opportunity to increase their credit score and savings to be able to qualify for a better mortgage rate in the future. Buyers also have the opportunity to live in the home and neighborhood before buying.
1. Property Appreciation
Are more people moving to where you live every year? If the people looking for houses in your area increases and the amount of housing stays the same, the house you are looking at today could be worth a lot more a few years down the road. When you sign up for a rent to own agreement, you lock in what the property is worth right now. This means that your rent to own property will be your home and a good investment because the value of the property you purchase will be higher than the price you pay for it.
If properties depreciate instead, you can back out of buying the home. It is important to note that you have been paying premium rent for your property. The premiums are being saved in an escrow account for your eventual down payment on the property. Should you decide not to purchase the home, the seller will keep that money. If depreciation is the reason you are not buying the property, make sure that the depreciation outweighs the money you would lose from the escrow account.
2. Time
You might recognize that properties are appreciating in your area and want to buy one for yourself. However, your credit score and savings account have other plans for you. Locking in the price now means you have a few years to build up your credit score and save up for the home's down payment. So even though you are not ready to buy now, you do not miss out on the opportunity!
3. Mortgage Rates
Read up a little bit on how the economy is looking. Are mortgage rates high? If they are, rent to own might be a good way for you to wait for a better rate. In your research, you might find that today’s mortgage rates are fantastic. In that case, you may want to go ahead and purchase a home, if you are able. While there are no guarantees on how the market will move, if you aren’t sure you are getting your money's worth on a property, it's better not to purchase it at today's rates.
Is your credit score good enough to qualify for a mortgage, but not high enough to get you a good rate? Rent to own can give you the time to build up your credit score to qualify for a better rate in the future, while still taking advantage of today’s prices and property availability.
4. Flexibility
Sometimes you find a property you like, but you are just not sure about it. When the seller or realtor shows you the home, they are showing you the best parts of it. They don’t mention any hidden flaws the property may have. It can be scary to commit a large amount of money to a property when you could find out a month in that there are huge expenses you need to pay to fix the property. If you enter a rent to own agreement, you have time to live in the home for a few years and figure out if it is right for you.
More than just focusing on hidden issues with the house, you can figure out if the neighborhood is right for you. Do your neighbors have dogs that bark all night and do their business in your lawn? Do they play loud music on nights you must go to bed early? You would not find these quirks without living in the home. They might now work for your lifestyle. It’s better to learn this before buying the home.
It depends on your situation:
The above comes down to timing. If you’re ready to purchase a home now, do so. It can save you the extra rent money you would pay through rent to own. However, if you have doubts about rent to own, or your ability to purchase, the above benefits are great incentives to rent to own. Rent to own has its pitfalls, but if you’re aware of the pitfalls and the benefits, you can come out with a success story.
Rent to Own Benefits for the Seller
For the seller, the benefits of rent to own are a committed and incentivized buyer, steady cash flow and a way out of a slow market. While many sellers prefer to have a quick payout with the sale of the home, many will find it easier to sell their home by using the rent to own system than as a direct sale.
1. A Committed and Incentivized Buyer
While the buyer is not guaranteed to purchase your home, rent to own gives them an incentive to do so. Buyers who participate in rent to own pay an extra premium fee every month that goes towards their down payment for a property. That payment sits in an escrow account until they decide whether or not to purchase your home. If they decide not to, that payment goes to you. Typically, buyers do not want to lose the money they have been saving, and they will opt to purchase the home.
Additionally, buyers have, hopefully, used the time during the lease to improve their credit scores and save money. For that reason, they are more likely to qualify for a loan from the bank to be able to purchase your property.
2. Steady Cash Flow
Selling your home will provide you with a large influx of cash; however, the rent to own system will earn a monthly profit in the time leading up to the sale. While you will, eventually, sell your home and receive a large sum of cash, you can use your property as an investment property in the meantime. Rent payments are not returned to the buyer; therefore, the money that you make during the lease is additional profit for you.
3. A Way Out of a Slow Market
If the housing market is not booming in your area, you may feel as though your home will never sell. It's possible that the buyers in your area are not qualified to purchase your home for the price you are offering it at. If you find a buyer who is willing to lease with option to buy, this could be your best opportunity to sell your home. The buyer can use the time they are leasing your home to improve their credit and save up money to purchase your home. Rather than letting your house sit on the market, not earning you a profit, you will instead make money off of the property and direct your path toward a potential sale.