It is said that “Life is more expensive for you than it was for your parents”. This is quite true for every aspect of our life, but mostly, it implies the cost of living. Prices for buying new houses have skyrocketed over the past 50 years.
Yes, obviously, it is natural for prices to rise gradually over time if you consider inflation, but in 2016 the home prices went straight up to twice as fast as inflation.
This is the reason that even in 2021, despite having various investment options like gold, mutual funds, fixed deposits, or even cryptocurrencies, properties like houses are still considered as one of the best investment options.
Well, looking at the current scenario, it is nearly impossible for new and young buyers to buy a new home all on their own. To buy a new house, you will need a mortgage, a good credit score, and some cash to pay as a downpayment, and not everyone can afford that.
Thus it can be tough to buy a new home in the traditional way of straight away purchasing the house. That’s where the “rent-to-own” scheme comes into the picture. It is an alternate way of buying a new home and a go-to way for many individuals in the 21st century.
Today, we are going to understand everything about the rent-to-own-home scheme and if it is really beneficial or not.
Let us first understand the basic idea of the rent to own homes scheme because many of us are not familiar with this new concept.
What Is The Rent To Own Homes Scheme?
Rent to own is a legal transaction that is documented and controlled by the government. It is applicable to vehicles, electronics, furniture, and not just real property, as you may think. This kind of transaction first began in the United States itself, and now it has been accepted by many countries all around the world. It is also known as rental-purchase or rent to buy.
As the name suggests, a rent to own homes is a purchase made through a rental agreement. In this type of agreement, the renter is given an option to purchase the property after a certain period, unlike a traditional lease agreement where the renter does not have any such option to purchase the property.
It begins with a regular rental, where you rent the home for a certain amount of time, after which you get the option to buy the property before the lease expires. A certain amount of monthly rent goes towards the purchase price of the home.
How the Rent To Own Homes System Works?
The rent-to-own-home is a more complex process than the normal renting procedure. The conditions of the agreement vary with the type of agreement, and you should be careful while choosing one. Here is a general idea of how a rent-to-own-home system works.
The rent-to-own-home is a legal agreement between the seller, also called a leaser and the buyer, called a renter. The renter rents a property from a leaser for a certain amount of period. The renter is supposed to buy the property at the end of the agreement before the lease expires.
The renter usually has to pay an extra amount over the rent. This amount counts towards the downpayment of the property, which the renter will buy at the end of the agreement. This amount is non-refundable, and hence it is advised to sign the agreement carefully.
Now, as we know the basics of the rent-to-own-home system, let us take a look at the type of agreement. Yes, there are two different types of contracts you can choose from.
Types Of Rent To Own Homes Contract
You can choose the rent to own in one of the two ways, either lease-option or lease-purchase. Both types have their own benefits, and you can sign up for the one which suits your needs. Let us understand both types of contracts.
1. Lease Option
In the lease-option, you can sign the contract and start paying the rent. In this type of agreement, you will get an option to purchase the home at the end of the agreement before the lease expires.
You can choose to buy the home, or you can opt not to buy the home. If you choose to buy the property, you will have to do further transactions as per the agreement. If you do not want to purchase the property, you can simply walk away from it, and the contract will expire after the lease period.
The leaser won’t be able to file any obligation against you as you will no longer be bound to the contract or the property.
Note: Read the contract carefully before signing or making any agreement. We advise you to consult a real estate agent to avoid any further complications and make sure that you have selected a lease-option contract.
2. Lease Purchase
In the lease-purchase option, you are bound to purchase the property before the lease contract ends, or else the leaser can take legal action against you. You will have to buy the house, whether you want or not, which means you are legally bound to purchase the property even if you don’t have money.
Advantages Of Rent To Own Homes
The Rent to own homes scheme is really helpful for those who have a poor credit score to apply for a loan. This type of contract gives people time to improve their credit score and add more amounts to savings. Also, people get time to boost their income or arrange the downpayment and plan things accordingly so that they can purchase the house later.
This system allows people to live in the home they want to without actually buying it, so they can pay the rent for a certain period and can get time to identify and get to know their property and the surrounding before actually buying the property.
It also helps financially weak people to live in their dream house while making arrangements of funds to purchase the same home.
This rent to own system gives another solid benefit to the buyer which is, they get to buy the property, which both parties have agreed at the time of contract. Therefore, you won’t have to pay the raised price at the time of actual purchase when the lease is about to expire.
If someone wants to buy a property but they are not in a financial state to buy the property right away and also does not want to lose the chance to buy the desired property, such a rent to own homes contract ensures that no other than that person gets the house.
Well, it is clear that the rent to own homes is a great option to consider along with direct buying, there are a few disadvantages if we consider the option of directly buying the home.
Disadvantages Of Rent To Own Homes
Buying a home is not as complicated as a rent to own homes. In both cases, you will have to take a loan, whereas, in a rent to own homes, you will have to pay an extra amount of monthly rent.
In a rent to own situation, the leaser or the seller has most of the rights in his hand. If you miss an instalment in such a case, there is a chance your leaser will break the agreement and will keep the previous instalments to himself.
Whereas in the case of direct purchase, even if you miss an instalment, you can make up for it next time. The worst thing that could happen is your credit score will go down but you won’t suffer from any permanent loss.
If you fail to buy the property at the end of the lease contract, you may lose all the previous paid instalments.
In the case of the “lease purchase’ contract of rent to own homes, if you find problems with the property or if you have any issues, there is no way you cancel the agreement without losing any money.
Now let us see what is the procedure you need to follow to get a rent to own homes agreement.
Procedure For Rent To Own Homes
So far we have discussed that rent to own homes just require you to make a downpayment and pay monthly rent, but that is not all. The procedure for rent to own homes is not simple; rather it is complex than the direct purchase of a property.
But you don’t need to worry as I am going to give you a basic idea of what things you need to do in order to buy your dream home using rent-to-own.
1. Choose and sign one of the agreement
As we have seen already, select one type of agreement that suits your financial status and your goal, that is, between the lease agreement with an option to purchase or the lease agreement with purchase.
This rent to own homes agreement will be signed between you and the owner of the home you are willing to rent and purchase later. Make sure you select the proper type of contract. I recommend hiring a real estate agent for this purpose, and he will help you in other legal work as well.
The agreement will include the nature of the agreement, the time for which you will pay the rent before purchasing the home, and the amount of monthly rent you will be paying.
Review the terms and conditions of the agreement for various factors such as maintenance responsibilities, that is, who will be responsible for the maintenance of the house during the rent period.
Set a final sale price of the house after negotiating with the leaser. The price should be close to the current market price, and the location and the surrounding environment should be taken into consideration.
2. Payment of option fee
Once you have signed the contract, the next thing you will need to do is pay a one-time non-refundable fee. This fee is for the option to purchase the house once the lease period is over in the rent to own agreement.
This fee can be anywhere between 1% to 5% of the purchase price of the home. This fee makes sure that the home belongs to you and cannot be sold to anyone. This is a negotiable fee, and you can adjust the amount with your leaser.
3. Pay monthly rent
The monthly rent is very much different in rent to own homes than the direct purchase of the property. It is very crucial that you pay your monthly rent on time. If you miss any payment, it can lead to the cancellation of the rent to own agreement, and you will lose your money as well as the home.
The 25% to 30% of this monthly payment goes towards the actual selling price for purchasing a home. This can also help you to build a good credit score if you make payments regularly on time.
4. Apply for a mortgage
At the end of your lease contract, you will have an option to buy the house or compulsion to buy the house. That is the time when you will need to find and apply for a perfect mortgage. Even people who want to buy some property will need to apply for a mortgage just like you will have to.
Do some research, find a mortgage lender, and choose the type of mortgage, and you will be all set to purchase your brand new home under the rent to own homes agreement.
Well, we have covered pretty much everything about the rent to own system, but the real question is: Is rent to own homes a better option than the direct purchase of a house? The answer is not very simple, and it depends on your financial status.
If you are financially stable, you have good savings, a good credit score, and you are in a condition where you can purchase your dream home directly, then do not choose a rent to own system to buy your home. It is only going to make things complicated for you.
Whereas if you are someone who is not able to comply with the conditions for direct purchase like insufficient credit score or lack of savings for a downpayment, the rent to own homes is the most convenient and appropriate option for you.
This option can be most effective for young buyers. However, I will suggest consulting a professional expert before taking such huge financial decisions and do some research on your own.
I hope you found all your answers about the rent to own system; if not, then feel free to ask your queries in the comment box placed below. Also, drop your suggestions; your feedback is always the most important for us.
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