What Is A Rent To Own Home?

The term Rent To Own can also apply to Lease/Purchase, Lease With Option To Purchase, Rent To Buy, or many other terms. Rent To Own Homes have become a popular way for the owner of a home to sell it to a potential buyer. Although it is much like owner financing there are some common differences.

Buying a Rent To Own Home typically begins with a lease period and includes an option to purchase the home at the end of the lease.

Although there is no standard for a Rent To Own Home Agreement, many contracts contain common provisions. In general the agreement allows a tenant to become a homeowner if certain conditions are met. Those conditions usually require the tenant/buyer to pay an initial Option Fee and a Monthly Lease Payment for a specified period of time.

At the expiration of the lease period the tenant has the option to purchase the home for a specified amount. Financing the purchase at this time requires the tenant to secure a loan through a bank, mortgage lender or other outside source..

The Option To Purchase

The Option To Purchase can be contained within the Rent To Own, Lease Purchase Agreement, or exist as a separate contract. This provision normally stipulates the tenant/buyer's right to purchase the home for a specified amount at given time, usually the end of the lease period. The fee attached to this known as the Option Fee.

The Option Fee

Although the Option Fee is normally paid at the beginning of the lease period it should not be confused with a Rental Security Deposit. The Option Fee is a fee paid for the right to purchase the home. It is usually not refundable. In some cases it may be applied as a credit towards the purchase price of the home.

Monthly Rental Credit

Most Rent To Own Agreements will contain a provision that designates a portion of the Monthly Lease Payment as a credit towards the purchase of the home. This credit is known as the Monthly Rental Credit. This amount varies and is sometimes as high as 50% of the rental payment. The advantage to the tenant/buyer is the ability to begin building equity in the home during the lease period. When compared to a thirty-year amortization schedule it usually builds equity at a faster rate than a standard mortgage. It is important to note that if the option to purchase the home is not exercised then the credit is lost.

Rent To Own Home Hypothetical Example

Our example illustrates a home selling for $200,000. A 3% Option Fee would equal $6000. This amount is paid at the time that the lease begins.

The Monthly Lease Payment on the home in this example is 1% of the selling price. This generates a monthly payment of ($200,000 x 1%) or $2000.

In our example the investor is going to allow 30% of the Monthly Lease Payment to be credited towards a down payment on the home when the buyer purchases it. This Monthly Rental Credit would be ($2000x 30%) $600 each month.

We will assume that the rental or lease period is 24 months. In this case the buyer would pay a $6000 non-refundable Option Fee. They would pay 24 payments of $2000/month . At the end of the 24 month period the buyer would have the option to purchase the home for $200,000. During the lease period they would build up a total Down Payment Credit of $14,400 ($600 x 24 months). At this time the tenant/buyer would need to secure financing for $185,600 to purchase the Rent To Own Home.