So you are sick and tired of renting. You want to own your own home, but you do not have much of a down payment. No doubt you have heard of “the perfect solution” – rent to own. But is it really as perfect as everyone says – hardly. There are some secrets about rent to own properties that you need to know about. They are most overlooked aspects of a rent to own deal. So let us find out the truth about lease to own homes.
How Rent to Own Works
So this is how it works. You rent a house with the option to buy. You will have a lease that will typically last between 2 to 3 years. The seller will also expect you to put some sort of upfront down payment or option fee. This is usually 1 to 7 percent of the agreed upon purchase price. In addition to the rent, you will be paying what is called a Rent Premium or Rent Credit. This extra amounts put towards the purchase price of the house.
Let’s see how a Salt Lake City, Utah rent to own would work out. As of January, 2017 the median rent for a 3 bedroom, 2 bath house in Salt Lake City is $1,500. Now the additional amount that you will pay towards the purchase is negotiable. Generally you should expect to pay 20 to 50% above the market rent. For the sake of argument, let’s go with 25% which is about average. So you will pay $1,500 a month in rent and an additional $375 towards the purchase. If your lease lasts 3 years, you would have a rent credit in the amount of $13,500. Median home values in Salt Lake City are $280,000. If you paid a 3% option fee of $8,400 and combined that with the rent credit, you would end up with a down payment of $21,900 or 7.8%. Not bad.
The Truth about Rent to Own Homes
Do you want to know the dirty little secret few buyers in your position realize? If you decide that you are unable or unwilling to buy the house at the end of the lease agreement, you forfeit ALL of the money you have paid. That includes the Rent Premium and the option fee. Gone. All of it. The seller keeps all the money and you get to call a moving van and start all over.
You would be surprised on how many times this happens. The buyer may run into some problems with the house and they want out. Money lost. The buyer may not be able to qualify for a mortgage. Money lost. Or, imagine that the seller fails to pay the mortgage and the property gets foreclosed on. Yikes! Money lost.
So, before you race to snap up the closest rent to own or lease option property, make sure you do your due diligence and have the house inspected. Start working with a lender in order to qualify for a mortgage and for goodness sake, make sure you absolutely love the house.
However, a calculated decision of renting to own a house has it own benefits as well.