In this day an age when it is more than difficult to obtain a mortgage without near perfect credit, lease to own homes maybe a better and more affordable option for you. Also known as rent to own, this type of lease allows you to rent a home with the option of purchasing that home in the future once you improve your credit score. Because it is so hard to get approved for a loan, this puts pressure on seller’s to help buyers out. It’s truly a win-win for both parties. The seller get’s cash and the buyer moves into a home immediately.
If the buyer does not qualify for a mortgage within the time frame set in the contract, they will lose any upfront payments, such as the option fee, and any rent paid during that time.
The Option Fee
Typically, a renter deciding to enter this lease to own agreement would have to put down a large fee called an option fee. Sometime this fee can be financed by increasing the monthly rent. This option fee is usually 1 to 3% of the homes total value at the time of moving in. In most cases, this fee is usually put towards the down payment for the house.
The Upside
- Buyers can move in immediately even with less than perfect credit
- Gives buyers time to improve their credit and get approved for a mortgage
- Buyers can test out the house and neighborhood without a long term commitment
- Sellers receive a tenant with an interest in keep up the property (Maintenance, repairs, etc.)
- Sellers receive monthly rent to cover their mortgage
- If the sale does go through, both parties can save on Realtor commissions
Lease To Own Could Be A Nightmare
This type of lease could turn into a horror story for both the seller and buyer.
The biggest danger to a buyer are the contractual provisions that could possibly nullify the buy option. Usually there will be terms and conditions in the lease to own contract that you as the renter/buyer need to meet. Paying rent on time every month or lawn maintenance are examples of these kinds of conditions. If you fail to meet these conditions, the seller could cancel the contract.
Some landlords and sellers might look for ways to cancel the contract in hopes of evicting the buyer and gaining another opportunity to receive another option fee from another tenant. Be aware of what these terms and conditions are and that you can meet them.
Seller’s could destroy their own credit and be left with a home in shambles.
If the renter stops paying rent, rent that you as the seller were counting on for mortgage payments, this could leave you defaulting on your loan and possibly the bank foreclosing on your property.
The renter could also NOT care for the place and help with it’s disrepair. As the seller, you would be stuck with the bills to repair and salvage the property. Make sure to do a proper background check and demand proof of income. These two steps alone can protect you from entering a contract with a difficult tenant/buyer.
With a good deal in place, leasing to own can be a great way for a person to become a homeowner. As a buyer or seller entering into a lease to own agreement, it’s important to do your homework and understand what you’re getting into.
