Rent-to-Own: How to Find Rent-to-Own Homes NOW While Rebuilding Your Credit. Wendy Patton
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or Lease Agreement is very much like the lease agreement when renting an apartment or home. It defines the term of the lease, dictating how long the renter can live in the property as well as the amount of monthly rent and security deposit. Additionally, all of the other general rules and conditions of the lease are covered, such as the number of people permitted to live in the property, whether pets are allowed, how many cars, how repairs are handled and so on.
Option Agreement
The Option Agreement or Option to Purchase Agreement gives the tenant-buyer the right to purchase the home from the seller at a later date. It specifies how long the option agreement is valid. It states how long the tenant-buyer has to execute the purchase and close on the home. The option agreement usually does NOT specify the purchase price or terms of the purchase. It does, however, specify the amount of the option fee and whether there is a monthly option credit (option credits are an agreed upon amount that will be credited toward the purchase price should the renter purchase the property as agreed).
The Option Fee is what makes the Option Agreement valid; however, it is not 100% necessary to make it valid. Remember, option fees are non-refundable, but security deposits are refundable. Signing the Rental Agreement, which is a promise to pay (like a promissory note), would also be valuable for enforcing the option. As the buyer, you will want your option fee to be as little as possible (or only pay a security deposit), giving you less of a risk.
Sales Contract
The Sales Contract or Purchase Agreement is the document that covers the details of the purchase of your home. It includes the purchase price and what non-permanent features of the home are included in the purchase; such as the appliances, furnishings or the gorgeous 1965 Mustang convertible in the garage. It specifies how the home is to be paid for at the end of the option time period; either a mortgage or cash sale. Okay, it probably won’t be cash so don’t get too worried! The Sales Contract also specifies all of the other terms and conditions of the actual sale. For instance, how the property taxes will be prorated, whether the buyer will have a home inspection, etc. In this case, it is a rent-to-own transaction so the Purchase Agreement also notes that it is part of the Option to Purchase Agreement; thereby binding them together.
The Terms
In addition to the paperwork, which defines the details of the transaction, there are some terms of the agreements that are quite particular to rent-to-own transactions. In addition to being unique, they are extremely important. The terms cover the different financial aspects of the transaction, which can greatly affect YOUR bottom line.
In Chapter 11 - “Key Points to Negotiate – Not All Deals are Created Equal”, we will cover how you can negotiate these terms to make the deal better for you. They are:
Monthly Option Credit
As we mentioned, this is a portion of the monthly rent credited towards the purchase price ONLY if the tenant-buyer exercises the option to purchase. This credit is in no way mandatory, but can be very helpful to the buyer when it comes time to purchase. As the buyer, you will want to get as much in option credit as possible.
Monthly Rent Amount
Typically, rents are priced at market rent or a little bit more on a rent-to-own transaction, however, this amount can always be negotiated to make it better for you.
End Purchase Price
The amount the buyer will pay for the home once he exercises the right to purchase. This final amount will determine the buyer’s new mortgage payments. Here are some factors you should consider when deciding what to offer for the house.
•It’s a rent-to-own - Some rent-to-own sales may command a slightly higher purchase price; possibly as much as 5 to 10% more, depending on the strength of the real estate market in that area. As the buyer, of course, you don’t want to pay more than market value; you really want to get a deal on your new home.
•Items that are included in the sale - Items such as appliances, furnishings, pool tables and other properties all have monetary value. If you include the refrigerator, stove, dishwasher, washer and dryer in the purchase, you can be adding thousands of dollars worth of value. Don’t overlook the value of these items when determining the purchase price you will be offering.
•Who will make repairs - Who will be responsible for repairs during the rental period? Every repair costs money. If the home ends up needing a big-ticket item such as a roof or a furnace, it will be expensive. This is a point you can negotiate with the seller. This will be discussed in detail later in the book.
•Closing costs - The costs associated with the sale of the home, such as title insurance, mortgage origination or points, payment to the closing agent, etc. can be quite expensive. It is fairly common to include part of these costs in the mortgage to help reduce the amount of money the buyer has to pay out-of-pocket at the closing. When you talk to a lender (before you rent-to-own), get an estimate on how much you’ll need to close on the home. See if any of these costs are negotiable.
•Homeowner’s Association (HOA) or yearly fees - Lawn service, home security systems, etc. are all monthly and yearly maintenance fees and dues associated with the home. Other examples of these are pool service, lawn sprinkler maintenance and even country club fees. Many homes won’t have these or at least not all of them. Assigning responsibility for payment of these fees should be part of the negotiations.
Example: Let’s take a look at a sample transaction to help you understand the process.
John and Joan Homebuyers were told by their loan officer that they couldn’t qualify for a mortgage. “You must improve your credit score first.” They live in a “down” real estate market and know that now is a good time to buy. They have always dreamed of home ownership and want a home NOW. They enlist the help of Sally Agent, a local Realtor®, who understands how to do rent-to-own home transactions.
From talking with their loan officer, John and Joan have determined that once they qualify for a mortgage, they can afford the payments on a $220,000 home. So they begin to look in that price range. Alan and Ashley Homeseller live in the same market. A few months ago, Alan received a promotion at work that requires them to relocate to another city. Alan and Ashley know the real estate market is down, but they have no choice but to sell their home now. They have it listed with Realtor® Thomas Broker (and yes, I do go to great lengths to come up with these names).
Alan and Ashley have had their home listed for 4 months at $225,000 without any offers. The need to get their home sold is getting urgent. Their agent, Thomas, recommends Alan and Ashley reduce the asking price to $215,000. After Thomas explains to them how it works, Alan and Ashley agree to add the rent-to-own to their listing.
Soon, Sally Agent shows the house to John and Joan, who decide to make an offer on it. Their initial offer is $205,000 for the purchase price. They agree to the asking rent amount of $1,400 per month and ask for a $500 per month option credit. For their option fee, John and Joan offer 1%, or $2,050, and a $250 security deposit. They also ask that all appliances in the house (refrigerator, stove, dishwasher, washer and dryer) be included. After receiving the offer through Thomas, Alan and Ashley make a counter-offer of $210,000 for the purchase price, $200 per month option credit and an option fee of 2.5%, or $5,250, with a $750 security deposit. They agree to all of the appliances, except for the refrigerator which is brand new and they want to take it with them.
Getting closer to an agreement, John and Joan counter back accepting the $210,000 purchase price, but ask for a $350 per month option credit and an option fee of 2%, or $4,200, with a $500 security deposit. They agree to let