Please Explain Rent to Own
Creative financing in real estate provides buyers with less than stellar credit the chance to purchase a home. One method used by landlords to sell homes to tenants is known as rent to own, lease purchase or an option to purchase. Regardless of the term, the landlord agrees to sell the home to the tenant after a set period of time, during which a portion of the rent is applied to the down payment for the purchase.
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Purchase Price
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When a rent-to-own transaction is considered, both parties must agree upon a purchase price. The price is fixed for the lease period, typically a year, and the tenant may exercise the right, or option, to purchase the home at that time. The price usually reflects market value of the home at the time of the lease agreement and may be determined through an appraisal, comparable sales research or by using the services of a real estate agent.
Option Fee and Down Payment
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Two items of particular concern to the tenant, or buyer, are the amount the owner requires for the initial option fee and the amount of down payment due when the option is exercised. Both amounts are negotiable between the tenant and landlord and vary widely. In Cincinatti, for example, the maximum amount a landlord is allowed to charge per year as an option fee is 1.5 times one month of rent for the first year. This increases in subsequent years. According to the City of Cincinnati, the option fee is not refundable, so you should be sure that the arrangement is right for you.
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Lease Period and Contract
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During the lease period, usually one to two years, the landlord may agree to apply a portion of the rent toward the down payment due when the purchase is completed. The responsibilities for repairs, maintenance and payment of taxes and insurance may be assigned to either party during the lease period and should be clearly defined in a written agreement. According to the University of Tennessee Knoxville School of Law, lease-purchase agreements are not covered under the Uniform Residential Landlord Tenant Act.
Risks
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Having a professional home inspection educates prospective buyers about the costs associated with maintaining a home in the future, advises the City of Cincinnati. The tenant buyer also risks losing all of the money paid for the non-refundable option fee and toward the down payment should they decide to cancel the purchase. On the owner's side, the risks involve guaranteeing that the buyers are qualified to complete the purchase by securing a loan or continuing to make monthly payments, according to Nolo.com. Both parties should consider consulting with a real estate attorney before completing a rent-to-own transaction.
Benefits
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A tenant wishing to become a homeowner, but who may not qualify for a conventional mortgage, may find seller financing a more viable option. A landlord hoping to sell an investment property and avoid paying sales commissions and other costs may benefit from offering a tenant the option to purchase the home. A tenant planning to purchase a rental home also may be more likely to maintain the home adequately and feel a pride of ownership.
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