Rent-to-own agreements are binding contracts that combine a lease with an option to buy the property within an agreed upon period of time, generally 36 months or less. The buyer/renter agrees to pay an option fee (anywhere from 1% to 5% of the purchase price) that is credited toward the purchase price. The buyer/renter agrees to pay the rent and a rent premium that is also credited toward the agreed upon purchase price.
One of the major disadvantages to buyer/renters is that they will lose the rent premium and the option fee if they back out of the contract by not exercising their option to purchase. For renter/buyers, this means that they must find another house to rent or perhaps buy. There are accompanying costs whether they choose to rent or buy, and they must pay for these costs after having lost thousands of dollars by not exercising their purchase option.
Rent-to-own contracts usually include a clause that makes the buyer/renter responsible for any repairs that the house may need during the period of the contract. If the house should need a new roof or any other major repairs during the length of the contract, the renter/buyer would have to weigh repair costs versus the costs involved in backing out of the agreement.
For sellers, the main disadvantage would have to be not being able to accept a better offer for the home. If someone were to come along and offer substantially more for the home, a seller would not be able to consider this or any other offer during the period of the contract. They would also not be able to raise the price of the house if the market should go up during that time. Conversely, if the market should go down, they would still receive the agreed upon price for the home.
Another disadvantage would have to be getting stuck with a house that the sellers no longer want or need if the buyers should decide to back out. There may be a mortgage involved with the old house that they no longer want to pay, which means that they will have additional costs during the time that the house remains unsold or unrented.
An advantage for renter/buyers is that they will have time to repair their credit if it needs to be repaired. They also have the advantage of building a down payment so that they can own the home at the end of the contract. If renter/buyers should discover that there is something seriously wrong with the home, the contract is usually structured in such a way that they can simply back out of the contract. However, each individual contract is a bit different, and buyer/renters must make sure that this clause is included in any agreement that they sign.
For a rent-to-own agreement to work, both parties must find it beneficial. Therefore, both parties must work toward making it fair and equitable. Buyer/renters should have knowledge of the process so that they do not end up with an agreement that only benefits the seller. Sellers must be aware that they may get stuck with a property they no longer want if the contract is too onerous.
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