Many people believe rent for a lease-option home is higher than normal rent. That’s not always the case. When it is, it’s because the buyer and the seller negotiated rent credits into their contract. Rent credits are a completely optional factor of rent to own.
People often confuse the three types of rent credits. There are traditional rent credits, premium payments and premium matching. Each serves a different purpose.
The basis of all three types of rent credits is that the buyer gets to keep the money if he or she purchases the home. If he or she does not purchase the home, the seller keeps the money. The money incentivizes the buyer to purchase, as he or she will receive nothing if they do not, and serves as a consolation for the seller if the buyer does not buy. The money is kept in an escrow account until the end of the lease term.
What is a Traditional Rent Credit?
Traditionally, rent credits are a percentage of rent that the seller gives back to the tenant because they are renting to own the home. This is the best option for the buyer, but the worst option for the seller. Sellers typically use this tactic in situations when their home has been on the market for a long period of time and they are very eager to lock someone into a sale.
Sellers charge the buyer fair market rent to lease the property throughout the term. The buyer pays nothing more than another renter would in a traditional lease (i.e. not a rent to own deal).
This doesn’t cost the seller anything out of pocket. The money is a percentage of the rent that the buyer is paying each month. When the buyer pays rent, the corresponding rent credit goes into the escrow account and the rest goes to the seller’s bank account. Therefore, the seller is accepting less money to compensate for the use of his or her property, but not directly paying money.
In this situation, the buyer doesn’t lose any of his or her own money when deciding not to purchase – aside from the option fee. The money is an incentive for the buyer to buy, not a penalty for not buying. The money isn’t a direct consolation for the seller because the seller would have received the full amount of rent if he or she had not used rent credits.
What is a Premium Payment?
A premium payment is almost opposite traditional rent credits. With premium payments, the seller pockets the full fair market value of rent for the property each month. Instead, the seller pays an additional amount of money each month called the premium payment.
For example, if rent is $800 a month, the buyer might make a $100 premium payment each month. That extra $100 goes into the escrow account each month.
This is not truly beneficial for buyers because they could have saved that money themselves without risking the loss incurred from not buying the property. This is the best option for the seller, but the worst option for the buyer. The reason why buyers agree to premium payments is to convince an unconvinced seller to rent to own.
Most sellers do not know about rent to own and those who do are skeptical of it, for good reason. Many potential buyers who rent to own do not purchase the homes they rent. If a buyer is making premium payments, he or she is more likely to buy the home for two reasons: (1) He or she will lose more money than if he or she had not paid premium payments and (2) he or she has saved more money in the escrow account making him or her more likely to have enough money for a down payment on a mortgage.
What is Premium Matching?
Premium matching is a combination of traditional rent credits and premium payments. In this situation, the buyer pays fair market rent, plus premium payments. The seller matches the buyer’s premium payment with money from the rent paid. Thus, if the buyer pays an extra $100 to the escrow account, the seller will also contribute $100 of the rent money to the escrow account.
The buyer is incentivized twice as much to purchase the home; however, the seller receives the same amount of consolation as they would in a premium payment situation, as the money the seller matched would have belonged to the seller had no rent credit been used.
This option balances the seller’s and buyer’s interests evenly. If you are going to use rent credits, this is the fairest option for both parties; however, not using rent credits is equally fair. It is used when a seller wants to ensure that the buyer is incentivized to buy. Sellers who are eager to sell their homes will use this strategy. Buyers can also negotiate matching payments from the seller because through this method they are saving money by renting to own instead of renting and then finding a property to buy.
Part of the Negotiations Process
Rent credits are a part of the rent to own negotiation process. A seller and buyer may not use rent credits, or they might negotiate to use one that is more beneficial to one person over the other. However, it is important to note that there isn’t supposed to be a winner and a loser of a rent to own deal. Both participants are expected to benefit equally from the deal.
The seller might give more concessions in the deal because the house has many repairs he or she wants the buyer to make. Or the buyer may have a href=”https://renttoownlabs.com/rent-to-own-during-bad-credit”>poor credit and compromise more to give the seller faith that he or she will raise it in time for the closing.
Vail Colorado Forest House by MariaMichelle is licensed under CC0.