Definition of Rent to Own
The terms "rent to own" and "lease option" are most prevalent in the housing arena. "Option" is the operative concept in either arrangement. When you sign a rent-to-own or lease-option agreement on a house or condo, you are given the right to buy the home in the future at a price agreed on now, according to Steve McLinden, a Bankrate real estate adviser.
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Basics
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Under a rent-to-own or lease-option agreement, the renter/buyer typically pays a slightly higher monthly rent, with a portion of it applied toward the future down payment on the home. A rent-to-own agreement can have advantages and disadvantages for the seller and the buyer, depending on the details of the arrangement and the condition of the housing market.
Option Importance
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Some rent-to-own agreements require the renter to buy the home at the end of the lease, while others give the option to purchase. A required purchase provision could be a financially bad move if home values depreciate over the term of the lease. You may have to pay an upfront fee to lock in the purchase option.
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The Market
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Some homes are specifically listed with rent to own as an option. However, other homes listed for sale, rent or lease can be potential rent-to-own opportunities, according to Rent to Own. A renter/buyer can simply ask the property owner if he will consider a rent-to-own agreement.
Buyer Benefits
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A rent-to-own agreement can provide several benefits for the renter/buyer. A buyer without money for a down payment can use the lease-option arrangement to accrue money toward a down payment while living in the house she wants to buy. The buyer can decide if he really likes the house and the neighborhood during the lease period. Setting a purchase price at the beginning of the lease term provides a financial benefit for the buyer when housing prices are rising.
Buyer Disadvantages
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The biggest hindrance to buyers in the rent-to-own housing market is that they don't fully understand the process, according to Cleveland Ohio Mortgage. Renter/buyers can agree to unfavorable terms because they're uninformed, or unethical sellers may take advantage of them. Buyers should consult with a lender before entering into a lease-purchase agreement to determine if they have the necessary credit scores, income and down payment to get financing for the home at the end of the lease term. If housing prices in the area are declining, it may not make financial sense to buy the house in a year or two at a price agreed on today.
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