Ever since the housing bubble burst, we’ve seen home sale prices go down and rent prices go up. However, with all of the uncertainty in the housing market (not to mention all of the extra red tape to get a loan!), the rent vs. buy debate has never been louder.
But there’s a third option that most people don’t think about – renting to own.
Before the recession, renting to own wasn’t really a possibility. After all, sellers had tons of offers to choose from (most of which were at sky-high prices). But now that prices are a fraction of what they were a few years ago and houses are spending months and months on the market, more sellers are leaning towards a rent to own option.
What exactly does the process entail?
It starts off like a typical rental agreement. The tenants move in and start paying a monthly payment. But instead of that money being used solely as rent (and, thus, not building any equity with it), part of the payments are put towards an eventual purchase. For example, you might agree that the monthly payment will be $2,000 – with $500 going toward the purchase price every month. So, at the end of the year, the tenant will have knocked $6,000 off the price of the house.
But if only part of the money is going towards actually buying the house, doesn’t that take forever?
In fact, most of these deals last two to five years. Once that period is over, the tenants can buy the house outright, just like they would in a traditional sale. The only difference is that they’ve knocked a significant amount off the purchase price, thanks to all of their monthly payments. (In our example, the tenants would have knocked $30,000 off the purchase price after five years!)
But why would a seller agree to a transaction that could drag on for five years?
It’s certainly not as ideal as putting your house on the market, finding a buyer, closing the deal, and moving on. However, in certain situations, it could be a real lifesaver.
Think, for example, what would happen if you had to move for a new job – leaving your house behind to sit on the market for months on end. There you’d be, living in a new city, paying to live somewhere else AND paying for your house that you couldn’t sell. It would be no different than flushing money down the drain every month! And, for every month that your house sits un-sold, the lower your chances of getting anything even remotely close to the asking price.
By doing a rent to own, you could get someone in the house right now. The money they pay you would offset the money you’d have to spend on mortgage payments, homeowners’ insurance, property taxes, homeowners’ association fees, etc. Sure, you’d still be responsible for the house – but you’d be responsible for it if it was sitting empty, too! At least this way, your house won’t become a financial black hole.
Why would a buyer choose to purchase a house this way?
It’s a great option for people who want to “try out” the house and the neighborhood first. After all, most rent to own contracts have an “out” for the tenants. At the end of your lease, you’re not required to buy the house. Of course, any money you’ve put towards buying the house in rent will be lost, but you won’t be stuck with a house you don’t want.
Plus, rent to own deals are great for people with not-so-great credit, who can’t qualify for a loan right now – or who can’t qualify for a loan that’s big enough to buy this particular house. But, by knocking thousands of dollars off the purchase price through the rent to own process, you may get it low enough to get a lender to play ball with you.
In the end, no matter what side you’re on, everyone can win!
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