Rent is often called “dead money” because it takes care of your in-the-moment needs without working for your future. Approached from this mindset, a rent-to-own home buyer scheme sounds perfect. Though these programs do allow you to convert rent money into homeownership without the demand for a large deposit, there are plenty of strings attached.
So, before you rush out and hire a property investment advisor, consider the following five facts about rent-to-own programs.
1. The contract will be complicated
Rent-to-buy programs come with a more complex contract than your average lease agreement or mortgage. Though schemes differ from state to state and country to country, in general, they start out as a lease agreement with the option to buy at a set time. At this stage, if all is going well, you’ll be able to convert your rent paid into a deposit for a home loan, and only at this time does the house actually shift into your name.
Keep in mind that this is only general information. Your contract and its terms may differ. The takeaway here is that the contracts are complicated, and the home generally isn’t yours right away. So, you need to ensure you understand what you’re signing before you sign it.
2. There are upfront fees
To qualify for a rent-to-own home, you’ll have to pay some upfront fees, and these are almost always non-refundable. The core fee you’ll have to pay is usually referred to as the “option fee” (or a similar variation). This is the price you pay for the option to purchase at a later day. It’s not a set fee but it generally sits between around 1-5% of the purchase price of the property. Since it’s not set in stone, you may be able to negotiate.
3. You must pay close attention to the purchase price
It’s essential to agree on when and how the purchase price will be determined, and you must ensure this is written into the contract. The seller may be willing to agree on a purchase price when you sign the contract. However, they’ll usually only do this if you agree to a price that’s higher than the current market value.
4. Do the same research you would do with any home purchase
Considering the points made above, it’s essential that you treat this like any property purchase. Rent-to-own contracts aren’t all that common, so you may be tempted to take the first one that comes along. However, if you pay the upfront fees and agree to a higher than market value purchase price for a property that ends up being problematic, you’ll be locked into an uncomfortable (and costly) bind.
So, it’s essential to ensure that the neighborhood, school district, public transport situation, infrastructure, and other key amenities are suitable. You also need to do all the requisite checks and inspections to be certain that the property itself is sound.
5. Not all of your rent will be applied to the principal
Even if all goes well, it’s unlikely that your contract will see every penny of your rent go toward the eventual purchase of the property. The owner has to get a good deal out of this contract, and since they won’t be getting all the money upfront, they’ll be looking to take a portion of your payments as rent, only allowing some of it to contribute to the principal.
The points above don’t detract from the good deal a rent-to-own property can be for both the buyer and the seller. However, they are essential to consider before signing a contract.