What is a home with the option to rent with the option to buy or lease?
A lease-option home purchase (also rent-to-own purchase” or “rent-to-own”) is a lease combined with an option agreement to pay for the house within a set time, usually three years or less, at an agreed-upon cost .The borrower pays an option fee, 1% to 5% of the cost, which is credited to the purchase value The borrower pays monthly rent and an additional rental payment that is also due credited to the purchase price.If the purchase option is not exercised, the buyer forfeits both the non-refundable option fee and any rental premiums paid.
As with any type of monetary contract, lease-to-own deals can be arranged in such a way that all reimbursement flows to one party and none to the other. Buyers should be especially vigilant. But the rent-to-own strategy has sound tax rationale, which means they can be arranged in a way that benefits both parties.
Characteristics of the rental contract with option to buy
A rent-to-own has 6 main needs. The sale price of the home and the rent are determined by the market, but subject to commitment just like in a direct purchase transaction or a rental transaction. Buyers often know less about the market than sellers, which puts them in a weak spot unless they do a little research, which is sensible.
Buyers generally like a long option period better, as it provides additional time to build capital and repair credit. An extended period can be a boomerang for them, however, if they can never cash in the option, they lose the rent payment they have been paying all along, plus the non-refundable option fee. Sellers generally like a short option period better, but not too short, or you’ll never buy the house.
The option price and rental payment are viewed differently by buyers and sellers. To the renter/buyer, they are equity in the home they will soon purchase. Fully anticipating that they will exercise the option, the only cost is the interest they would otherwise have earned. For sellers, on the other hand, these payments are the biggest promise that they will sell their properties. If they don’t sell, the payments are retained as earnings. The benefit to the seller generally outweighs the cost to the buyer, making the lease option transaction viable and win-win.
Using a lease-to-own agreement to buy
Rent-to-own offers favorable home ownership terms to consumers who are not eligible for credit from any source, but are willing to take a gamble on themselves. The bet is that before the lease-to-own period expires, they will qualify for the financing they require to make the purchase option effective. During the lease-to-own period, they have the opportunity to rebuild their credit and build equity while living in the home.
Consumers who need to rebuild their credit score for the term of the lease-to-own agreement should understand that paying their rent on time will not. Rent payments from tenants are not used to compile your credit score. Fair Isaac, the company that developed the credit score, recently submitted an “expansion” score based on non-traditional credit data, which does not yet include rent payment information for individual tenants. Rent-to-own buyers who need a better credit score should focus on their credit cards, loans, and other bad debt.
The right not to exercise the option has value for buyers, even if it is costly. You may find that something is seriously wrong with the house, the neighborhood, or even the neighbors. The money left on the table with a lease to own is usually much less important than the cost of an outright purchase followed by a quick sale.
