The Dirty Little Secret about Rent to Own (Lease Options) that All Tenants, Renters, and Potential Buyers Should Know

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 is a dirty little secret about rent to own properties that you need to know about. 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 amount is put towards the purchase price of the house.

Let’s see how a typical rent to own would work out. As an example, let’s say that the rent for a 3 bedroom, 2 bath house 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. If the purchase price was $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.

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.

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.

Before you consider a rent to own scenario, you will want to make sure that you are in or will be able to be in a good position to qualify for a mortgage by the time the purchase option is available. If your credit score is not very good, continuing to rent while you are working on improving it may be the wisest choice. Another thing to keep in mind is that it will be unlikely that you will be able to have enough for a down payment based solely on the rent premium you pay each month. This means that you will need to be able to save additional funds to meet lender down payment requirements. So, before you race to snap up the closest rent to own or lease option property make sure you are ready and willing to see the contract through to the end.

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