Here’s How Lease-To-Own Homes Work

Owning your own home:  It’s long been portrayed as part of realizing the American dream. A sign that you’ve grown up, that you’ve “made it,” that individual achievement and success have finally arrived at your door.

But what if instead of feeling warm excitement when it comes to buying a house, you find yourself getting cold feet? You might want to consider a lease-to-own, or rent-to-own, agreement, which eliminates the necessity of coming up with a down payment and offers additional perks as well. However, as the saying goes:  Look before you leap. Here are some important things to know before entering into this type of agreement.

They Look Good On Paper But…What Are Lease-To-Own And Rent-To-Own Homes?

Lease-to-own, also known as rent-to-own, agreements allow you to rent and live in a house that you’d like to buy in the future. While you’re living in the home and renting it, you’ll be required to pay an extra amount every month, which can be used as a down payment when the rental term is up. This type of agreement is considered a means of transitioning to homeownership without having to provide a downpayment.

Before entering into a lease-to-own agreement, both the buyer and the seller sign a contract specifying how much of the monthly rent payment will count towards eventual equity in the home. Sounds straightforward and simple enough, but buyer beware:  A lease-to-own agreement is governed by fewer regulations compared to straightforward home buying or renting. Before you sign on the dotted line, consider seeking input and advice from an attorney or a real estate agent who can help clarify what you’re getting into.

Start From The Ground Floor:  Know What You’re Getting Into

If you decide to go with a lease-to-own home, you’ll be renting a house from the property owner or from a property company. You can choose from two types of agreements:  lease option or lease purchase. An option agreement allows you to decide if you want to move ahead with purchasing the home at the conclusion of the rental term, while a purchase agreement legally requires you to go through with a sale agreement.

Both types of agreements generally contain the following elements:

* Purchase Price  With a lease-to-own agreement, the house price might be determined at the time of contract signing, or it may be decided after the lease term expires. Be aware that the price could be based on the home’s value at the time of signing or what the seller believes the value will be in the future.

* Lease Term  The contract you sign will stipulate the term (how long you will rent the home). If the term ends and you decide you’re no longer interested in purchasing the home, or if you don’t financially qualify for financing, the option to buy will no longer be in effect.

* Rent Payments  The contract will specify the amount of your monthly rental payment.

* Option Fee  You’ll be required to pay this one-time, non-refundable fee, which grants you the opportunity to purchase the house; the fee amount is usually based on a percentage of the home’s value. The seller has the option to apply this sum towards your equity in the home.

* Maintenance And Other Costs  During the time you’re renting the property, the seller can ask you to cover any standard costs associated with the home such as general maintenance and repairs. You might also be responsible for additional costs, including property taxes and homeowner’s association (HOA) fees.

* Closing Requirements  When the lease term ends, you’ll need to secure financing if you plan to purchase the house. Once the financing is approved, a closing date will be set, at which time property ownership will transfer to you.

Forge Ahead?

A lease-to-own agreement has definite advantages, among them:  You don’t need to offer an upfront down payment all at once. Another bonus:  Your down payment installments build equity in the home before you’re the owner. And because you’re delaying purchasing the home, you’ll have more time to shop around for the best mortgage deals. Additionally, you won’t be competing with other home buyers anxious to make a purchase right away, which can ultimately drive up the selling price of a house.

Or Forget It?

A lease-to-own agreement can fall under the category of “If it seems too good to be true…”. First off, your rent will be significantly more than that of a simple rental agreement, which could impact your finances. In addition, your landlord or property owner doesn’t have to apply your option money towards your down payment — they can decide to keep it for themselves, meaning money that has come out of your pocket won’t necessarily result in any advantages coming your way. Keep in mind also that the seller can change their mind at any time in the leasing or renting process, or outright cancel the contract for what they view as a violation or infraction, leaving you with no recourse other than a court challenge.

Because housing markets are always in a state of flux, the value of the home you’re renting could decrease, which may have negative implications when it comes to future financing. If you agree to a set price at signing but the home decreases in value when you’re looking to buy, a mortgage lender could balk at loaning you more money than the house is worth.

And perhaps most importantly, if you decide that home buying isn’t for you when the rental term comes to an end, you’ll have next to nothing to show for the months (or years) that you’ve been paying for the property, as you’ll lose all of the money you’ve invested in the home’s equity.