Rent to Own vs. Normal Renting
March 23, 2016 by Natalie Heller |
Here are six common questions and answers highlighting the differences between a rent to own vs traditional rental agreement.
1. So what are rent to own homes?
Rent to own is a type of leasing agreement where a tenant makes monthly payments to a landlord over a period of time, with the intent of purchasing the home at the end of the given period. The rent to own agreement has three main parts: option fee, base rent, and rent premium. Understanding these components is key to making an educated home buying decision.
At the beginning of the term the tenant pays an initial deposit, called an option fee, which guarantees them the option to buy the home. Throughout the term, the tenant pays a rent premium in addition to their base rent, building credit to be used later on. At the end of the term, if the tenant decides purchase the home, they’ll be reimbursed their option fee and rent premium. If not, the landlord gets to keep the option fee and all the rent money.
2. What’s the difference between a rent to own vs rent agreement?
The main difference between rent to own vs rent agreement comes down to one thing: building equity. When you rent a home the normal way, you pay for your initial deposit, monthly rent, and extra for utilities, but you receive 0% ownership towards the house. On the other hand, in rent to own, you pay a monthly base rent, as well as monthly rent premium and option fee, that you may use towards the cost of your down payment.
In essence, renting to own brings you one step closer to becoming a homeowner by enabling you to save up for the initial down payment on your home. Most down payments are fairly large and can be worth 20% of the purchase price or more, which is why saving up from the beginning can be extremely helpful in the long-run.
3. Why do people choose to rent to own vs rent?
There are several reasons people may want to rent to own vs rent. The most popular reasons tend to involve poor buyer credit, insufficient savings, and low income. With a weak credit score and limited cash you won’t be able to buy a house right off the bat. The rent to own process usually takes about three to five years, in order to give buyers adequate time to smooth out their personal finances. If you are able to accumulate enough capital by the end of the leasing term to fund the down payment and become eligible for a mortgage, you have the choice to purchase the home.
4. Do I need to purchase the home when my lease expires?
Not necessarily. This depends if you have signed a rent to own or lease purchase agreement. If your contract is a rent to own contract, you simply have the option to buy the home once the renting term ends. In favorable conditions, you’ll probably want to purchase the home if you can, otherwise you’ll lose all of your rent credit and option fee to the landlord.
On the contrary, if you entered into a lease purchase agreement, this means you are obligated to buy the home when your lease is over. So if you come up short at the end of the lease, you could be in big trouble with the law. It’s often hard to distinguish between the terms Rent to Own vs. Lease to Own vs. Lease Purchase, since they all sound quite similar. Wording can make a huge difference, which is why it’s extremely important to clarify every detail before you begin the rent to own process.
5. Why aren’t rent to own homes as popular as renting or buying?
It probably occurred to you that rent to own seems like a pretty promising deal– you could get to move into your dream house right away, all while saving up for eventually owning it one day. Well, there are many other aspects of you need to consider before making this kind of decision. Although the rent to own process is becoming increasingly popular, it still holds very small portion within the entire housing market; the conversion rate of homeownership for rent to own is actually very low, at around 10%.
Many buyers begin renting to own with limited information about the nature of the agreement and as a result, most of them are unable to purchase the home when their lease expires. At Rent to Own Labs, our goal is to provide you with as much guidance as possible– to break down the rent to own process into a clear and understandable method so that you’ll be able to make an educated decision.
6. Is rent to own relatively new?
Nope. People have been renting to own since the 1950’s, however, in recent years this leasing agreement has become more prevalent. Especially since it’s becoming increasingly harder to obtain mortgage loans. With the rise of the internet age, information is becoming super accessible; people are becoming more aware of rent to own homes and the benefits that come with it. As a result, the housing market now includes more rent to own sellers and buyers than ever before– who are all eager to achieve success in this type of transaction.