Thinking about purchasing a home or vehicle? If so, you are probably wondering is lease-to-own a good idea. Here, you will learn more about the rent-to-own process and whether it could be the right option for you!
What Is a Rent-to-Own Agreement?
A rent-to-own agreement is an arrangement between a buyer and a seller with the understanding that the buyer will rent a piece of property for a specific period of time, after which the buyer will officially purchase the property from the seller. Typically, lease options are available for a vehicle, a rent-to-own home, or land.
How Do Rent-to-Own Agreements Work?
How does rent-to-own work? The rent-to-own process is fairly similar to the traditional renting process. You visit a property, speak with the landlord or property manager and submit an application. Upon approval, the property owner will approach you with a contract. Read over the contract carefully and make sure you understand everything. Once you do, simply sign the contract and enjoy your property!
The rent-to-own process also usually comes with a few fees. Instead of a down payment, rent-to-own agreements usually require an option fee. An option fee, also called option money or option consideration, is usually around 1%-3% of the total purchase price.
What Are The Different Kinds of Leases?
Whether you are planning to purchase a car or a home with a lease, there are a few different kinds you want to know about. For an auto lease, there are open-ended and closed-ended leases. An open-ended lease leaves details like the final purchase price up to negotiation at the end of the contract, while a closed-ended lease finalizes the details within the contract.
For homes, there are lease-purchase agreements and lease option contracts. A lease-purchase agreement, also called a lease-purchase contract, commits the person renting the property to purchase it at the end of the lease term. A lease option contract also called a lease option agreement, gives the person renting the property the choice of whether to purchase the property or not at the end of the lease term.
Lease purchase agreements hammer out most of the specifics within the actual contract, like purchase price and other fees. On the other hand, lease-option agreements leave those details up for negotiation after the lease term ends. If you know for sure that you want to purchase the property you are renting; you may want to opt for a lease-purchase contract. If you would like some time to think and decide, consider a lease option contract.
Can You Break a Lease Early?
Breaking a lease is not ideal, but sometimes it is the only option. Unfortunately, if you break a lease for a vehicle or a home, there are consequences you may have to deal with. If you break a car lease, there are most likely fees and penalties you will have to pay. Similarly, if you break a property lease, the landlord may have you pay the following monthly rent payment or cover other fees and expenses you would have been responsible for if you were still in the lease.
Does Lease-to-Own Build Credit?
Over time, leasing to own has the ability to help your overall credit! When you commit to a rent-to-own lease agreement, you acquire what is considered by most financial institutions as good debt. Good debts are loans and other financial endeavors that benefit the borrower in the long run. Rent-to-own debt benefits the borrower in the long run because, at the end of the lease term, they end up with a valuable piece of property. Other types of good debt are student loans that work towards giving the borrower an education.
Alternatively, there are also bad kinds of debt. Bad debts are loans that bring only short-term financial relief and typically no other benefits. These types of loans also usually leave the borrower in more debt than what they started with. An example of bad debt would be an online payday loan.
Pros and Cons of Rent-to-Own Contracts
Before committing to a rent-to-own contract, consider the advantages and disadvantages. Some perks you can take advantage of with a rent-to-own agreement are:
You Don’t Need Perfect Credit
In order to qualify for a mortgage with ideal interest rates, buyers will need to have a decent credit score. Usually, people with scores within the seven or eight hundreds will get the best mortgage rates. If you have poor credit, you may not get approved for a mortgage loan at all. Or, if you do, chances are the interest rates will be on the higher side. With a rent-to-own agreement, the credit score requirements are much more inclusive. You could be approved for a loan with competitive rates even if you have less than perfect credit. That way, you can rent a home even with bad credit.
Rent-to-Own Programs Give You Time To Save Money and Avoid a Down Payment
When purchasing a home with a mortgage. Buyers are typically required to make a large down payment before closing on the agreement. This down payment can be anywhere from 3%-8% of the total purchase price. Depending on how expensive the home is, you could be looking at a down payment of tens of thousands of dollars when buying. If you don’t have that kind of money upfront, you may have difficulty purchasing a home.
With a lease-to-own program, you have a bit of time to save money instead of paying a bulk sum upfront. That way, you will be better able to afford the purchase price at the end of the lease.
There are also some disadvantages of rent-to-own agreements you should be aware of.
May Still Be Responsible for Maintenance
Renters are often responsible for property upkeep and maintenance in a rent-to-own program. With a traditional renting agreement, the landlord is in charge of paying for and maintaining the property. This responsibility can save renters hundreds or even thousands of dollars, depending on the kind of upkeep the property requires. But, with rent-to-own agreements, the original landlord will often shift that responsibility to the future buyer. Before entering into a rent-to-own agreement, make sure you can afford expenses like:
- Appliance upkeep and repair.
- Electrical repair.
- Property taxes.
- Possible association fees.
Not All the Money Goes Toward the Purchase Price
Rent-to-own agreements can be a bit of a financial drain. As you pay rent during the terms of a rent-to-own agreement, not all of the money goes towards the actual home purchase. Instead, none or just a portion of the money you pay goes towards your future purchase. Rent-to-own contracts should clearly display how much each monthly payment will go towards a down payment or the overall purchase price.
What To Do Before You Sign a Rent-to-Own Agreement
Before you sign a rent-to-own contract, there are a few precautions you may want to take.
Understand Terms of the Rent-to-Own Agreement
When you receive the rent-to-own contract, read it over thoroughly. Make sure you understand all the terms, deadlines, and potential penalties you will have to deal with if you break your lease. The contract should also state how much your rent payment will be and the time when you should expect to pay the eventual purchase price.
Get Help With Rent-to-Own Contracts if Needed
If there is anything in your lease-purchase agreement that you don’t understand, consult an expert. You may want to get some assistance from a real estate attorney or a real estate agent. These real estate professionals should be able to answer any questions you have about rent-to-own homes and contracts. They may even be able to help you negotiate a rent payment, down payment, or the final purchase price of the property.
Finalize the Details
Both the buyer and seller should agree upon the basic details of rent-to-own agreements. Talk with the buyer and make sure you both are on the same page about core details like:
- Who is paying for upkeep and maintenance?
- What is the lease period?
- Will the final purchase price be determined beforehand or by the real estate market value after the terms of the contract.
Research the Rent-to-Own Property, Area, and Seller
Finally, before committing to a rent-to-own contract, do a bit of research on the property, area, and even the individual seller. Make sure the property value aligns with the purchase price requested by the seller. If they are asking for a higher price than the property is worth, consider negotiating for a more reasonable price.
When purchasing a property like a home or a vehicle, how you go about buying it is an important decision. Buying outright is quicker but more expensive, while lease to own takes longer but may be more affordable. In the end, do whatever is most comfortable for you.