Rent and Own It Later

It is not uncommon, but it may not be advertised widely. Most of the time it may be advertised as a home for rent, but in some cases, you may actually be able to get a house under the rent-to-own home type.

For many people overseas, rent-to-own home type, which is also called lease-to-own, is a good option many times. This is especially true for those who put their house up for sale after they have moved into a new house, but yet to find another buyer for their house yet. This gives the next owner to potentially rent the house first due to insufficient funds to pay for the down payment.

In this option, a renter may pay a certain amount each month to live in the house like a normal house rent, and at the end of an agreed period, they have the option to buy the house. It is usually set for a period of three years. The monthly rental that they pay is considered an income for the seller, with a portion of it going directly as a down payment for the eventual purchase of the home.

In such cases, both the seller and the renter need to have a very clear understanding about the contract. Yes, a contract is best drawn up for this type of arrangement to avoid any conflict in the near future. For the seller, this is a good way to avoid having to pay for two mortgages. Even if mortgage for the first home is already fully paid, the seller need not keep waiting for an interested buyer who can cough up the down payment for the house. Meanwhile, the genuine buyer will also be able to get the house even though he cannot afford an immediate down payment.

Before entering into an agreement, the seller and the renter should agree on the sale price and the rental price that they will charge to the house. Do note that once the agreement is signed, the price of the house will be locked until the end of the rental term which is usually three years. It will make no difference whether the property price rises or falls later on, because the agreed-upon sale price in the agreement is final once signed.

The renter will have to pay an option fee besides the rent premium. The option fee is the amount which converts as part of the down payment at the end of the contract period. If the contract period expires and the renter does not want to buy the house, the option fee is forfeited as an income for the seller. Under this option, the rent premium is also higher than regular rental fees, because part of the money of the rent premium will contribute towards the down payment of the house as well.

Surely there are pros and cons to this type of agreement. To avoid arguments, the contract should state very clearly about many things, such as who fixes problems to the home during the rental period, and a binding price to the house during the end of the rental period, plus the management of the portion of the rent premium and option fee which will become a deposit for the house. So, what are the advantages and disadvantages for each side?