How to Rent to Own a House

So you find yourself at a point in your life when you are ready to buy a home, but you lack good credit or a down payment to make your dream a reality. One alternative is to rent to own a house. This has advantages for both the owner and the tenant-buyer. For the owner, it is a way to get more income from the house while you rent, and it can promise him a good price when he sells it. For you, it can be a way of strengthening your financial position so you can buy at the end of the lease. Here is how you can rent to own a house of your own.

Difficulty:

Challenging

Instructions

1. Consult with a banker before you begin. Your banker can give you an assessment of how likely it is that you will be able to qualify for a mortgage in a year or two. You can help by putting your financial information and prospects together in an organized way, obtain a copy of your credit report and draw up a realistic financial plan for the next couple of years.

2. Search for houses available on a rent-to-buy basis. Most owners who want to lease on a rent-to-buy basis will advertise in local newspapers or real estate publications. You may be able to find houses through real estate agents. Take your time with this. Remember you aren't looking for just one more place to rent--you are looking for a home you may live in for 10 years or a lifetime.

3. Look at the total price of the house, and compare it to those in the area of similar build. A little comparison shopping is necessary to make sure you get a great deal. Don't take the word of a real estate agent who may have his best interests at heart. Keep your own interests in mind, and make sure the price fair and competitive.

4. Consider the length of the lease. It should be a minimum of one year, but a two- or three-year lease is better. The longer term will give you time to build your credit and financial position.

5. Negotiate the terms of the contract with the owner. Ask for what you want. Ask for a little bit more than what you want in order to leave negotiation room, but don't get too extreme to avoid having an owner turn his back to you entirely.

6. Negotiate the payments you will make. There are three parts to what you pay when you rent to own a house. The rent is one, but you will also have to pay a premium, which will be applied to the purchase price if you buy the house. There is also an option fee to consider. This can be 3 percent to 5 percent of the price of the house, and it will also apply to the purchase if you buy.

7. Have your lawyer review the contract before you sign it. All the terms should be spelled out clearly. Make sure that you have an exclusive right to buy at the end of the contract. Go over the terms, and make sure you can afford to make all the payments required by the contract.

8. Take care of the home as if you already owned it. After all, that's the whole idea. There are limits to this, of course. The owner will be responsible for much of the maintenance, and you don't want to invest in any remodeling until you actually own the house. Otherwise, treat this house as though you already own it.

9. Exercise your option to buy. This is the goal you are aiming towards when you rent to buy a house. You may find a better house for a better deal, and you may choose not to buy. Simply keep in mind that you will lose all fees and premiums paid on top of the rent during the contract period. Those are nonrefundable. Ultimately, this gives you time to decide what is right for you.

Tips & Warnings

• The usual lease-with-option-to-buy contract ranges from one to three years, and you will have to pay a fee and rent premium, which will be applied to the purchase of the home if you buy at the end of the lease. Of course, you will also have to pay a standard rent to the current home owner.

• Don't choose this path if you do not see your financial situation improving and strengthening within three years. You will not want to do this if you do not see yourself realistically in a position to buy a home in a few years.

References

• Rent to Own Homes