In our current economy state more often than not houses are sitting on the market for weeks and months, homeowners are becoming fed-up and deciding to Rent-to-Own to either get our of their current financial situation.
In many cases the Rent-to-Own practice is also called an Option, Lease Option or Lease Purchase Sale. All practices are customary and have now become commonplace across the country.
Rent-to-Own contracts can be a bit difficult in deciding fairness and actual terms since a good percentage, if not all, do not involve brokers, agents, or lawyers. Usually these types of contracts are handled between the seller and buyer.
Now, options to purchase, lease options and lease purchase agreements are three different Rent-to-Own financing documents. Regulations vary from state-to-state and not all states have identical regulations. Before you enter into a contract with a seller, it would be wise for buyers to obtain advice from a real estate lawyer.
In this article you’ll find useful and helpful information that may assist you should you decide to partake in this type of property ownership. It’s important to remember that since the seller and buyer decide on the agreeable terms of the contract there could be many variations of terms. It is standard practice that both seller and buyer would negotiate terms that would benefit themselves.
Usually, a Rent-to-Own agreement sets aside an agreed percentage of the monthly rent payment in escrow towards the purchase price down payment or as a deduction of an equal amount off of the purchase price. The renter would only benefit from this if they fully intended to purchase the house at the end of the contract term. If the renter defaults or decides they do not wish to continue with the Rent-to-Own agreement, the seller is then entitled to the escrowed funds.
No matter what terms are agreed upon it is common practice for the seller to hold the title and pay the annual property taxes. All other terms can be negotiated.
Keep in mind that sellers will treat this type of sale as a legal contract and in doing so will normally require the same type of qualifying standards as say a mortgage lender, but depending on their own situation they may be inclined to forgive some unfavorable credit worthiness.
Be prepared to authorize a credit check, and employment verification. The seller may even require a reference from your last place of residence. In some cases the seller may even require a small good faith down payment to ensure you’re serious about actually purchasing their home.
As the buyer you would be wise to spend the money upfront and have a home inspection done before you sign the contract. If you decide not to and get one later on for closing, as would be required, and there are items that don’t pass the inspection you’d be faced with a very difficult decision. The seller could claim those items were fine when you started your contract and you’d have to either pay to fix the inspected items before closing or decline the contract and loose your escrowed funds. But, if you had an inspection before you signed the contract you would surely find out if any items would not pass and at that time could ask the seller to fix them, negotiate them, or decline the contract offer. Most importantly is to not enter into a contract that would leave you with more out of pocket than expected for closing on your new home at the end of the contract.
When you do finally reach the end of your contract it will still be necessary to then involve a financing institution, an appraiser, and title company. In some cases there may be other parties as well.
On a good note, while you’re under a Rent-to-Own contract, the seller may not list or sell the house to anyone else, even if they have another offer for full purchase. Your contract with them ties up their house for the full term of your contract. Upon contract conclusion either you will buy or not, and then the seller may do as they wish with the property.
As the buyer there are some very important topics to keep on top of and ensure compliance even though you may think it’s the seller responsibility. And, they very well may be, but it would be a waste of your time and money were you not to ensure the following topics were adhered to:
Make sure there are no liens on the property and require the seller to provide you with a written annual guarantee that no liens have occurred.
Require the seller provide you with a copy of their mortgage contract that lists all of the stipulations and requirements to ensure the current mortgage company’s contract does not conflict with the terms of your Rent-to-Own contract. If this were to happen it would make your contract null and void and if the seller refused to return any monies you’d already paid, then you’d have to take them to court to get it back.
Make all of your payments and on-time. If you do not pay your rent or pay it late consistently it may cause the seller’s mortgage to go into foreclosure and your contract would become null and void and you would be out any monies already invested.
A final note, keep in mind that a Rent-to-Own agreement is supposed to be temporary. It would not be considered customary for the contract term to exceed two years a more common contract term would be for one year.