While some homeowners are ready to move on from their property quickly, that may not always be the best option financially. A rent-to-own arrangement offers sellers an alternative to the traditional process to help them avoid selling under less-than-ideal conditions. It also allows homeowners to use their property as a source of additional passive income. If you find that the market isn’t in your favour for selling your home and are open to becoming a landlord, rent-to-own is an excellent option.
Table of Contents - How the Rent-to-Own Process Works to Benefit Sellers
A rent-to-own arrangement consists of a seller who functions as the landlord while the tenant works towards becoming a homeowner. The tenant pays the monthly rent in addition to an option fee, which goes towards buying the home. The seller/landlord and buyer/tenant create an agreement outlining that the tenant has the option to buy the home at some point in the future; however, the tenant also has the option to walk away from the agreement.
Why should sellers consider rent-to-own?
You’ll need to expand the pool of buyers who can buy your property if you’re not getting a lot of interest in your home. If your home is in an area where renting is popular or buyers have poor credit, rent-to-own can make homeownership easier to achieve for potential buyers in your area.
Additionally, rent-to-own can help you lock in a great rate for your property. While you may not sell the property for a couple of years, you will set the purchase price in your rent-to-own agreement. Leaving the home on the market for months will decrease its value. You cannot predict where the market will be in the future, but with rent-to-own, you can secure a price you feel comfortable with now. Additionally, rent-to-own is a flexible and convenient agreement for tenants/buyers. You can ask for a premium on that flexibility by raising the purchase price of your home.
A tenant who plans to buy the home will be a much better tenant than one who only plans to rent for one year. While the tenant doesn’t own the home yet, he or she will feel a sense of pride and ownership over the property. This will translate to taking better care of your house while it’s still yours.
You might be ready to move on from the property, but you can take solace in the passive income you’ll earn each month from the tenant. Even if the tenant decides not to buy the home at the end of the agreement, you’ll still benefit from the option fee you collected.
Creating a rent-to-own agreement
A rent-to-own agreement consists of two pieces: the lease terms for renting and the option to purchase. There is no standard rent-to-own agreement, but a real estate lawyer can help you create a document that fits your needs.
The lease terms for renting look as they would for a traditional landlord-tenant relationship. This is not a buyer-seller transaction. The title to the home remains with the owner until the tenant purchases the property per the agreement. The lease agreement includes standard terms like the monthly rent payment, when rent is due, the duration of the lease and the responsibilities of the tenant and the landlord.
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The option to purchase outlines the terms for how the tenant can eventually buy the home. The tenant/buyer has the option to purchase the home within a certain amount of time, usually three years. The agreement states how the tenant can work towards the down payment, either by paying the option fee upfront or by making an additional payment on top of rent each month. If the tenant does not buy the home at the end of the agreement, he or she loses the option fee. The agreement should outline where the option fee is kept, such as in an escrow account, and who is responsible for managing the funds.
Included in the agreement is the final purchase price of the home. This price is locked in, so even if the value of the home changes at the end of the term, the buyer is still obligated to pay the price listed in the agreement. The buyer could end up paying more or less than the home is worth three years after signing the agreement. Similarly, the seller risks selling their home for less than it’s worth; however, one of the benefits of a rent-to-own agreement is that the seller has a locked-in price and has the peace of mind of having a prospective buyer.
Tenant/buyer and landlord/seller obligations
Because the tenant has entered a standard lease agreement, the tenant must make regular rent payments on time and in the full amount. Because the tenant is likely making larger monthly payments to include the option fee, the landlord is responsible for ensuring the money is saved to be put towards the down payment. The landlord can reserve the escrow funds and refund the tenant during the purchase process or apply the funds towards the principal on the house. The tenant is building equity in the home throughout the lease by paying the option fee.
Because the landlord is still the homeowner, the tenant must abide by any rules the landlord sets. This includes not having pets, not letting people reside in the home without a lease or doing anything else the landlord requests. The tenant needs to respect the landlord’s property until they have completed the purchase. If the tenant violates the lease, the agreement could be nullified and voided, and the tenant will forfeit the option fee.
There is one aspect of tenancy where the tenant can treat the house as their own. Unlike a traditional rental agreement, the tenant is generally responsible for any repairs or maintenance on the home. Because the tenant will eventually own the home, paying for maintenance and repairs is an investment in their property. Any upgrades or changes need to be cleared with the landlord first.
Rent-to-own can be an ideal alternative to the traditional home-buying process. If you’re interested in selling your home, but aren’t in a hurry or can’t find the right buyer, rent-to-own might be the perfect option for you.
How to Make Lease Option, Rent To Own Offers for Real Estate Investors
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