Rent To Own Real Estate The Benefits And Risks For Home Buyers

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Rent-to-Own Real Estate: The Benefits and Risks for Home Buyers

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by  | Jul 7, 2014

Moving home new beginnings. Couple with baby.

Rent-to-own real estate may sound like a dream come true. Under the best circumstances, everyone benefits: Sellers collect rent and have a purchase commitment from the buyers, and the buyers can move in right away. Credit problems or other financial issues that could hamper a buyer's ability to get a mortgage matter less.

But buying a home is a major financial commitment. While rent-to-own real estate may not be traditional, that doesn't make them less complicated. Don’t let your excitement over becoming a homeowner (or selling an unused property) keep you from doing your homework.

Ordinarily, sellers don’t like being landlords. They prefer to get their money in one lump sum and avoid dealing with renters. Rent-to-own homes are more common when there is a downturn in the real estate market and numerous homes on the market are vacant. Under a rent-to-own plan, the seller can lock in a price before the market drops further.

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The key to a smooth transaction is ensuring you understand the entire process. Here's what you need to know about rent-to-own homes, as well as the risks involved for buyers.

Terms of rent-to-own real estate

Read your contract closely and be sure you can handle the terms. The rent-to-own real estate contract should include the home price, the cost of rent, and the deadline for you to exercise your option to buy. It should specify what portion of the rent payment is credited toward the home purchase—or if you need to write two checks each month, for the rent and for the home payment—and under what circumstances the contract can be voided.

You should be certain there is no language allowing the landlord to evict you for a minor infraction after you have made a substantial financial investment. It’s worth the expense to have an experienced real estate attorney look at your lease-option contract to make sure you are protected.

Rent-to-own homes fees

The option fee likely will cost between 1% and 5% of the purchase price. Tenants also can expect their rent to add up to slightly more than the market rate during the lease. Usually all or part of the option fee will be set aside as a down payment. While the home is being rented, the landlord retains ownership but often requires the tenant to assume maintenance responsibilities.

Know the risks of rent-to-own real estate

Buyers see benefits—but not without some big potential roadblocks. In many cases, they are counting on being able to rebuild their damaged credit rating while living in the rent-to-own home and paying above-market rent. To benefit, they must be able to get their financial house in order and qualify for a home loan before their lease option expires. Should the market drop significantly, the renter might end up owing a lot more on a house than it's worth. And it's harder to move out should your lifestyle change.

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Leasing with an option to buy can be a good financial tool if you know what you’re doing. Before you go the rent-to-own real estate route, talk to a lender or mortgage broker to make sure that you will be able to qualify for a loan.

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