The Truth About Rent to Own

Hello Hampton Roads,

I often get asked by buyers to help them find rent-to-own homes, but the truth is that this type of home purchase only works for a small number of people.  For the majority of buyers it is by far the most expensive way to purchase.  The buyers for whom rent to own would work are those with challenging credit who can't qualify for a regular mortgage but have funds in hand to entice the seller to make the transaction work.

Rent to own means "rent with the option to buy" and there is generally upfront option money paid to the seller that is non-refundable whether the buyer purchases the home or not.  The rental period is short term, not more than one to two years, and is negotiable with the seller.  The longer the rental period, the more risk to the seller so the more expensive the option money; the converse is true with shorter rental periods costing less.  The amout of option money is negotiated between buyer and seller and is usually a percentage of the purchase price; between 1%-6% is typical.  If the option is not exercised during the rental period, the buyer may negotiate another option for an additional fee.  Additionally the rent charged may be above market rent with the overage going towards the purchase price.  Not all of the rent gets applied towards the purchase, only a portion of it.

The majority of homes in our market are not open to rent to own as owners prefer to sell their homes quickly to buyers who have aleady secured financing.  Most sellers usually need the funds from the sale and can't wait for the buyer to close on the home after the rental period.  This automatically limits the amount of inventory to buyers looking for this type of transaction.  Another thing for buyers to know is that the homes that are open to rent to own are generally homes that have been on the market a while and have not sold because the price is too high.  Any house, regardless of condition, will sell for the right price, so if a house doesn't sell it's a pricing issue.

The key to making rent to own work for the buyer is if the home is one that the buyer truly wants and if the buyer can qualify for regular financing in less than a year.  This allows the buyer to lock up the home he or she likes, have the benefit of moving in  early, and eventually owning it in a few months. The shorter the rental period, the less costly it is for the buyer.  The seller also wins because he or she gets a little extra in rent money and a closing within a few months.

If you have any questions or want to learn more about the home buying proess in general, please sign up for the upcoming free home buyer class and wine tasting on Nov. 5th!

Thanks for Reading,


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