The term “rent-to-own” sounds like a contradiction for good reason. It’s often called upon to reconcile a buyer-seller situation that does not fit a standard mold. A town rent-to-own agreement can allow potential buyers to move into an area house before their finances are up to snuff (or at least that’s the call most lenders would make). It’s can be a useful contradiction for both parties, because the would-be buyer can get the immediate benefit of living in their choice of home knowing that some portion of the rent paid has the potential of building residential equity, while the seller will either eventually have successfully sold the property or have benefitted from some cash flow should the sale fail to materialize.
If this rent-to-own scenario sounds like a win-win, that’s because it is…that is, unless it isn’t. The reason that rent-to-own is not more popular with local home buyers and sellers is because of some frequently encountered landmines—but a well thought-out arrangement can tackle most of the major ones. When both parties (and their legal counsel) anticipate the most likely future circumstances, among them will be:
- Purchase price. This will be an amount that is agreeable to both parties…one that ideally will also seem fair at the future time when the deed changes hands.
- Option consideration. To compensate the current owner for the loss of ability to sell the property to anyone else during the term of the rent-to-own agreement, a non-refundable amount (usually somewhere between 2%-7%) can be negotiated. If a portion of this consideration can be applied toward the ultimate purchase, it may increase the incentive for the rent-to-own tenant/buyer to complete the sale.
- It’s “rent-to-own” because a monthly rental is negotiated—usually at a higher-than-market rate with a portion of the excess to be applied toward the purchase price.
- The length of the agreement—the amount of time the renter/buyer has to complete the purchase—is a key provision. A common reason that a rent-to-own agreement is desired at all is because the buyer needs time to qualify for a traditional home loan, so negotiating a sufficient length of time to accomplish that can be critical.
- Ongoing maintenance. Spelling out precisely which party is responsible for which classifications of maintenance will prevent a common problem from cropping up. Especially in a situation where the tenant will not be completing the sale, the landlord will be keen to protect the property’s integrity.
- And taxes, homeowners’ association fees, insurance—any and all details that need to be addressed so that both parties are aware of their responsibilities. Failure to anticipate any one of them can end in a dispute…and that benefits no one!
A town rent-to-own agreement can be a terrific way to realize a sale that would otherwise not be possible. The key is to anticipate not just the hoped-for, smooth-sailing outcome, but all of the obstacles that might crop up along the way. Rent-to-own is just one of the possibilities that an experienced real estate professional will help you to consider.
Be sure to give me a call when your sights are set on buying or selling a local home!