What is Rent-to-Own?
Rent to own: You don’t rent-to-sell your house to become rich. You do it to avoid becoming poor. If you’re relocating for work, scaling up to a better house or moving to adapt to some other life change and the market is preventing you from selling your home, then it’s something to consider. Unless you enjoy the prospect of paying two mortgages every month indefinitely, this is one way of minimizing the financial damage.
Let’s say that you find someone who is interested in buying the house, but can’t because their credit isn’t quite right. This is how a lease option should work:
- After securing the go-ahead from a mortgage broker and before moving in, your potential buyer will give you nonrefundable deposit to go toward the down payment of the house.
- The buyer rents your house for a period of time; usually two years, and during that period, they pay you monthly rent. A portion of the rent also goes toward the eventual down payment of your house.
- After two years, according to your contract, your renter has the option to buy the home, with all of the down payment money going toward the purchase price, and since they’ve put a considerable amount toward buying it, they generally choose that option. If they don’t, the seller keeps the down payment money.
Your imagination is the limit, but the most logical scenario is that your renter, after paying rent and money to go toward a down payment for those two years, still can’t get approval from a bank to buy your house.
Or, arguably worse, your renter could have trouble making payments to you while you still have to pay the mortgage on your house, and you decide you want to end this relationship. Except that your renter resists being kicked out of your home, and you each get lawyers and everything deteriorates from there.
Or your renter might be a slob and treat your home poorly, letting their pets ruin the carpet and their kids draw on the walls. This isn’t so bad if they buy the place, but it’s quite bad if they don’t. Fortunately, one of the benefits of renting a house to someone who plans to buy it is that, generally, they treat it much better than they do a place they believe they’ll never own. In fact, some people may treat your home better than you do.
It’s easy to forget that part. After all, you are selling your home. You might easily think that you’ll move out, people will move in and you won’t see them again until two years later at the closing. That could happen, but it probably won’t. If your renters want to refinish the basement, if the contract is what it should be, they need to get your permission first, and you have to grant permission. If there’s a leak in the roof or mold in the walls or some other structural damage, it’s ultimately your job to fix it, even if your contract states otherwise. Odds are something will come up over two years where you’ll engage in some landlord-type activity.
How to Find a Buyer
You’ll want to actively search for people interested in renting and later owning a house. Renting to own a house has been around for a long time. They have gotten a bad rap, because it’s generally been a seller taking advantage of an naive buyer.