Whether you’re a first time homebuyer looking for a quality home that doesn’t require a large downpayment, or a veteran real estate investor trying to expand your portfolio with cash flow positive properties, rent to own homes can be a great way to find the property that’s right for you.
Before you jump in and buy the first home with a lease option you find, however, there a few things you should keep in mind.
Don’t Overpay for the Property
The first point to keep in mind is that many sellers charge a premium for rent to buy properties. This reflects the fact that they are effectively carrying over a loan on the property for the renter, and because of that feel they can charge a price that’s on their own terms, which can translate to a higher than normal price, compared to what the house would sell for if it were listed on the traditional market.
The ability to purchase a home with little to no downpayment can lure unsophisticated buyers into thinking the purchase is a good deal, when in reality the premium asking price doesn’t line up with the “great deal” buyers think they’re getting from the property.
Agree On Clear Rent To Buy Contract Terms
Another area to be cautious when considering a rent to own house is what, exactly, the terms of the arrangement are.
These contract terms can vary widely from one seller to another, and – despite what anyone might tell you – there really are no “standard” terms to follow. The short answer is that the terms will be whatever you can negotiate with the seller.
In some cases, the buyers and sellers agree on a monthly price, and a portion of that price is attributed to the cost of renting and living in the property, while another portion is attributed towards equity in the house. Often times, this arrangement is set up for 1-3 years, allowing the buyer enough time to build equity in the house that can be used as a downpayment to finance a loan for the remainder of the sale.
Other times, the seller will officially sell the house to the individuals upfront, for a very small downpayment, and then carry back financing on the house. In this case, be sure to clarify the interest rate used, as the seller is effectively acting as a bank. Because this type of transaction is often arranged for low credit buyers who cannot qualify for a traditional mortgage, interest rates can be high, and make the purchase a bad deal. The seller also usually retains the right to assume control of the property in case the buyer defaults on the purchase, just as a bank would foreclose on a mortgage. The difference is that many sellers look for any excuse to repossess the house and are often inflexible in their arrangements.
Many Rent To Own Houses Aren’t Listed with Agents
Finally, it’s also important to keep in mind that many rent to own property options aren’t listed with your traditional real estate agents. That’s because sellers of rent to buy homes are usually real estate investors, not individual homeowners, and know how to sell the property without needing to cough up fees to the real estate agencies.
This can be beneficial, since it will ultimately save transaction costs for the purchase, which can translate into a lower price, but it can also mean that if you’re shopping for a home exclusively through an agent, you might miss out on a lot of great opportunities.
The solution is to sign up for a comprehensive list of available rent to own properties in your area. These resources generally charge a small fee (around $50) but are worth the investment if you’re serious about finding a great property. You’ll also be able to work directly with the sellers, which will save thousands of dollars in the long run.