The Basics of Rent-to-Own Agreements
Beneficial to both tenants and landlords, rent-to-own agreements provide tenants the option to purchase a rental property after living a specified amount of time at that residence. While such contracts commonly involve single-family homes, they can also be applied to apartments, condos, and duplexes. To better understand how such an arrangement can benefit you, here are some of the basic concepts and components of rent-to-own agreements.
Basic Components of Rent-To-Own
A rent-to-own agreement actually consists of two separate agreements: a standard rental or lease agreement and an option to purchase the property. The contracts for both the property rental and option to purchase are established and settled before the lease begins.
The Rental Agreement
Similar to standard lease agreements between a landlord and a tenant, this agreement establishes the rental amount, rental period, and each party’s responsibilities.
The Option to Purchase
This option guarantees the tenant the right to purchase the rental property within a set amount of time. This option determines the tenant’s purchase window and purchase price.
Benefits for Tenants
Rent-to-own agreements are nice options for those with poor credit or insufficient funds to own a home. By paying higher than average rent each month, tenants involved in rent-to-own agreements are making upfront payments and thereby building equity in their future home during their rental period. That’s because their landlord takes a portion of their rent and puts it in an escrow account to be applied toward the principle of the house. However, the tenant must follow the terms of the contract during their rental, or they risk voiding the purchase option.
Benefits for Landlords
Rent-to-own agreements benefit landlords who have been unable to sell their rental property. Such agreements also free landlords of some of the responsibilities of maintaining a rental property. While the property is still legally owned by the landlord until the tenant exercises their right of purchase option, in rent-to-own agreements the tenant, not the landlord, is responsible for all property repairs, renovations, and maintenance.
Tenants are not obligated to purchase the property in a rent-to-own agreement. Choosing not to exercise their right to purchase will not hurt a tenant’s credit score, but they will forfeit any equity, and the landlord will keep all accumulated escrow fees paid toward the house.
Let Us Help You into a Home
If you’re having difficulty becoming a homeowner, contact Butler Mortgage. Our experienced loan officers can help you find a flexible mortgage plan that will best suit your needs. If you are interested in taking out a mortgage loan, contact us at 407-931-3800 and request a free consultation today.