Rent-to-own purchases have grown in popularity lately, especially among first time homebuyers. That’s because these transactions allow a person or a family to rent the home over a period time, with a portion of their monthly rent payments going to the purchase price of the home. Typically, there is no legal obligation for the renter to purchase the home after an extended period of time. However, the rent prices in these situations are usually much more expensive than an “average” rental, and should the renter opt out, they lose all of the extra money that they spent.
So, is one of these purchases right for you? A rent-to-own opportunity is great if you want to learn more about a neighborhood or if you don’t quite qualify for conventional lending. However, before you dive right into one of these transactions, you need to be on the lookout for these 3 things:
1. Higher deposits
Many times, the seller of a rent-to-own home requires higher deposits than he would under a “normal” lease. Since the seller is taking on some risk (after all, you may not buy the home in the end!), he may ask for a significant amount for the deposit that you may not be expecting. Another reason for higher deposits? To safeguard against value increases. After all, the seller is betting that his home’s value won’t increase dramatically from the price you both have agreed upon while you rent the home. A higher deposit can offset some of that risk. And remember, these deposits are normally non-refundable should you decide not to purchase the home.
2. Damaged credit
One big reason that a person may enter into a rent-to-own opportunity is to get some extra time to repair his credit. If you’re one of those people, you can bulk up your credit score while you make the extra rent payments – then look better to a bank when it comes time to get a loan to pay for the rest of the home. So, before you begin, find out exactly what your credit score is, and have a plan to raise it. Repairing damaged credit takes time, and it could take longer than the typical year that sellers offer in rent-to-own options. It’s even more important to be aware of your credit and the odds of you being able to boost it in a year’s time because of the higher deposits and higher rent payments. After all, if you can’t qualify for a loan later, you’ll simply be throwing your money away!
3. Reduced home value
Most rent-to-own homes have an agreed upon sales price at the beginning of the lease. The seller could lose out if the home value increases, but should the home value decrease, you really don’t have any negotiating power. Unless specifically stipulated in the contract – which is unusual – you won’t be able to lower the selling price. You can still walk away from the deal if the value isn’t what you were hoping for, but you may find yourself in a situation where you’ve already put in a bunch of money and you don’t want to walk away.
What’s the solution?
Do your homework! If experts are predicting that home values in your area are going to drop significantly, this probably isn’t the investment you want to make. As with all real-estate investments, it’s important to really learn and understand what you are getting into long before you begin any type of negotiations with a seller. Rent-to-own can be a great alternative to traditional home purchases, but it does come with some risks. Ensure that is it the right opportunity for you!
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