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Renting to Own: How It Works

By Chris Piraino

Renting to own is an interesting concept in real estate. Usually done by sellers who are having trouble selling their house, renting to own comes with its own benefits and disadvantages to both sellers and buyers. The process is fairly similar to a car lease, the buyer and seller enter into a contract stating the rent-to-own agreement, and agreeing on a rental price, time period, and purchase price of the house. All of these should be made clear in the contract, as there is no backing out of the agreement once it is signed.

A rent-to-own contract usually lasts for about 1-3 years, with the option for the buyer to purchase the house at the end of the contract. The purchase price for the house is usually agreed upon at the beginning and put in the contract, so the seller must be wary of changes in the housing market over the course of the contract, as you could must abide by the agreed upon price regardless of changes in value. For the perspective buyer, the rent will usually be a bit higher than comparable places, with a certain amount going towards the down payment on the house at the end of the contract. The amount of rent that goes to the down payment is called the rent premium. Also, an option fee is usually given to the seller at the beginning. The option fee is a percentage of the asking price and will be counted towards the down payment if the renter goes ahead and buys it, or it will become income for the seller if the renter decides to not buy the house.

There are a number of benefits to both the buyer and seller, along with a number of risks for both of them. The perspective buyer is able to live in the house before purchasing it, and if anything is seriously wrong with the house he can leave with almost no loss. Also, renting to own allows buyers to build up their credit score and income in order to be able to purchase the house. The risks for the buyer are that the contract usually stipulates that if the rent is every late, that month's rent credit to the down payment will not apply. This can be a big thing, as they are paying above market price in rent just to build up that down payment.

The seller benefits from the fact that they will have a steady stream of income from the rental, as well as the fact that people renting-to-own will usually take better care of the house. If the renter backs out of the agreement, the seller still has the option fee and rent premiums as income. The risks to the seller include selling the home at below market price if home values rise, and they cannot sell to a person willing to pay more unless the renter does not exercise their option. Finally, if the renter does not purchase the house, the seller is still left with a house that they don't want.

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anna panico

how do you go about renting to own?


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