10 Key Things to Understand Before Signing a Rent-To-Own Contract
- Author: Michael Bordonada
- Posted: 2024-05-22
Rent-to-own agreements are especially beneficial for candidates that desire a home but are struggling with credit issues or cannot afford a down payment.
As a renter, it is important to be cautious and knowledgeable prior to signing a rent-to-own contract. Entering a rent-to-own agreement without fully understanding its stipulations can lead to a great amount of hassle and a loss of money. Following are 10 things to understand and complete before signing a rent-to-own contract.
1. Set a Fair Sale Price
If you enter a lease-option contract, no one (other than you) will be permitted to purchase the property during the set period. During the contract, you can usually purchase the property at any time at a sale price that is locked in.
If the home increases in value during the lease period, the deal can turn out to be an exceptional value for you. Alternatively, if the value of the home depreciates during the term, the set price may no longer be worth paying once your lease is up.
2. Is the Local Real Estate Market Strong?
Since the value of the home can go up or down, it is important to have an understanding of the local real estate market. Consider studying the local market to see what the housing trends indicate and determine the average worth of properties in the area.
Understanding the market will help you negotiate an appropriate final sale price for the home and will help increase your chance of renting a home that will hold its value or possibly even increase in value during your term.
3. Have an Inspection Performed
Prior to entering a contract, hire a licensed home inspector to complete a thorough evaluation of the home. Be sure to document any repairs that are required and take photos of the condition of the home. The purchase price should accurately reflect the condition of the home.
4. Check for Liens
Double check that there are no liens against the property to avoid any arguments over who the title of the home belongs to.
5. Define the Exit Clause
Ensure that the agreement clearly outlines what will happen if you choose not to purchase the home at the end of the term.
6. Check Payments and Taxes
Be sure that you are fully aware of any fees (taxes, insurance, mortgage) you are responsible for during the term of your lease.
7. Enlist a Professional
It can be invaluable to work with a real estate professional when signing a rent-to-own agreement. A seasoned professional can help you understand the contract, protect your interests, navigate the details of the process, and ensure a successful transaction.
8. Understand the Contract Details
At the beginning of the rent-to-own term, you and the seller will negotiate a contract that states the final sales price for the property. The contract also covers how long you can rent the home before you must decide if you wish to purchase the property or not.
Additionally, the document will outline how much rent you will pay each month and what portion of the rent will be put toward the property's final sale price.
9. What Is an Option Premium?
Upon signing a contract with the seller, you will begin paying an option premium. This cost is what gives you the sole right to buy the home at the end of the rental period. It is crucial to understand that this premium is nonrefundable even if you do not purchase the house at the end of the term. The option premium is usually around 5% of the final sale price.
10. Where Does Your Extra Cash Go if you Choose not to Buy?
Most tenants will lose the extra rent they paid each month if they choose to walk away from the property. Unless you are almost certain that you want to purchase the home, be hesitant of entering a rent-to-own contract.
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