5 FAQs about Rent-to-Own Homes Answered

One of the many factors of what makes certain cities and neighborhoods “hot markets” is the school district, and that very factor also plays a role in purchasing a home for many Americans looking to start a family or already have children. After losing bidding wars on hot homes in desirable neighborhoods, so many throw in the towel and resort to paying rent in hopes ANY home will hit the market soon.

If you’re one of the families resorting to renting just to stay in the neighborhood with the best school district, you may be forgetting about one very important, and more desirable, option: rent-to-own.

Here are the answers to 5 frequently asked questions about renting to own your next home:

FAQ #1. What does it mean to rent to own a home?

When doing your research, you may come across other terms also describing a rent-to-own property/contract, so keep an eye out for these:

  • Lease-to-own
  • Lease with option to buy
  • Lease-purchase contract

When renting to own a home, the renter of the property pays the landlord rent while a portion of the monthly payment may go towards the down payment on the home in the event the renter wants to move forward with the purchase when the lease term is up. The tenant usually pays rent for at least 12 months; though, your terms will vary depending on your specific agreement with the seller.

FAQ #2. How does the rent to own process work?

Not all single family homes for rent will be rent-to-own properties, but the best part about it is it’s negotiable, especially when the landlord is making extra income for the time you are renting. No two rent-to-own contracts are the same, and there are a few ways the rent-to-own process works, but here are the 2 most common:

  1. A portion of your rent is applied towards your down payment

In this particular case, the future buyer of the property pays rent (renter), usually monthly, to the owner of the property (seller) for a period of time negotiated in the contract. A percentage of the rent payment also negotiated in the contract is then applied towards the down payment, called a rent credit. The renter usually pays rent for 1-3 years, depending on the contract, PLUS the added rent credit. When it is time to purchase, the money paid in rent credit be used as down payment funds. Now, let’s do the math:

  • $1,200 (monthly rent) x 25% (percent used as rent credit) = $300 (monthly rent credit)
  • Your total rental payment per month will be $1,500
  • $300 (rent credit) x 3 (# of years paying rent) = $10,800
  • You will have $10,800 to use as a down payment

2. A portion of your rent is used to buy down the sale price

Using this option as a part of your contract works about the same way as the option mentioned above, however, the percentage of rent credit will be used towards lowering the sale price of the property being sold. What’s the difference? With this option, you will still need to come up with the down payment. Here’s an example using a $250,000 home:

  • $1,200 (monthly rent) x 25% (percent used as rent credit) = $300 (monthly rent credit)
  • $300 (rent credit) x 3 (# of years paying rent) = $10,800
  • $250,000 (sale price) – $10,800 (rent credit) =
  • Your loan amount will be $239,200

Note: Before deciding if renting to own your first or next home, make sure you fully understand ALL components of a lease-purchase contract. Discuss the option with a real estate professional, such as a real estate agent or mortgage consultant first.

FAQ #3. How do you negotiate a lease with option to buy contract?

Negotiating a rent-to-own contract on a single family, town home, or condo might sound intimidating, but with the right real estate agent and following these 7 steps, you’ll have just the right guidance you need:

  1. Start with a mortgage calculator and get a pre-approved amount from a mortgage consultant to make sure you stay at a comfortable price point. Pre-approvals are free and are at no obligation to you. There’s nothing worse than going through the hassle of the negotiating a contract and finding out you can’t afford it.

Step 2 of 7 of negotiating a rent-to-own contract. Research & find the right real estate agent. Not only are real estate agents knowledgeable about the process, they're pros at negotiating. They will be at your side or there to do all the dirty work for you. Not to mention, they know plenty of facts about the market, neighborhood, and other important factors you need to know before making a move on a rent-to-own home. Find this image on blog.phmc.com

2. Not only are real estate agents knowledgeable about the process, they’re pros at negotiating. They will be at your side or there to do all the dirty work for you. Not to mention, they know plenty of facts about the market, neighborhood, and other important factors you need to know before making a move on a rent-to-own home.

Step 3 of 7 of Negotiating a Rent-to-Own Contract: Find the home's value. Don't just use the Zillow Zestimate tool and call it a day. It's very important to look into every aspect of the homes history, physical condition, and of course, the condition of other homes in the neighborhood and its features. A real estate agent can help you find the value and other values around the neighborhood to compare. You should expect the value to be between the lowest and highest values of the neighborhood. Find this image on blog.phmc.com

3. Don’t just use the Zillow Zestimate tool and call it a day. It’s very important to look into every aspect of the homes history, physical condition, and of course, the condition of other homes in the neighborhood and its features. A real estate agent can help you find the value and other values around the neighborhood to compare. You should expect the value to be between the lowest and highest values of the neighborhood.

7 Steps to Negotiating a Rent to Own Contract | blog.phmc.com

4. You should not go above what you can currently qualify for. Your pre-approval letter from your mortgage consultant and real estate agent will be great tools in determining this amount. This will be your initial offer but is not guaranteed. Your agent can help come up with a fair offer that will not range too high if the seller counteroffers.

5. Before you sign on the dotted line, get an appraisal! The home may actually be worth more due to upgrades or less due to major/minor repairs that might have gone unseen by you, the real estate agent, and the seller. Of course, before you get into a contract, you’ll want to know if the home is suddenly out of price range or has major repairs that need to be made. Though it can take ample time for a thorough appraisal, you should be present and take notes of any issues the appraiser may point out.

Step 6 of 7 on Negotiating a Rent-to-own contract: Negotiate a final sales price. Ah, the fun part. This is the part that's most important to have a professional with you because market data, your appraisal, and pre-approval are important here. You can't negotiate without the facts! Make sure you and your real estate agent review any counteroffer the seller makes in order to ensure they make sense and include why your initial offer was too low. Decide if the counteroffer is reasonable and acceptable. Counteroffer again if need be.

6. Ah, the fun part. This is the part that’s most important to have a professional with you because market data, your appraisal, and pre-approval are important here. You can’t negotiate without the facts! Make sure you and your real estate agent review any counteroffer the seller makes in order to ensure they make sense and include why your initial offer wasn’t acceptable. Decide if the counteroffer is reasonable and counteroffer again if need be.

7. Now, its [almost] done and over with. Review the contract as much as you can, ask any final questions to make sure you fully understand the contract and what’s expected of you and or/the seller. Do not sign a contract you do not understand.

Download the 7 Steps to Negotiating a Rent-to-Own Contract infographic below👇

FAQ #4. How to find single family homes for rent?

Here are some online resources to find single family homes for rent or rent-to-own properties. We suggest staying away from Craigslist due to scammers, unless you know the posting is legitimate. You can also use these for condos and town homes too! Don’t forget that real estate agents find rental properties too. Just because they are not listed as “rent-to-own,” does not mean it’s not negotiable. 😉

  1. Zillow – make sure you select rent
  2. Trulia – make sure you select rent
  3. Realtor.com
  4. Housing List
  5. Renttoown.org/
  6. My rent to Own
  7. Rent to Own Homes
FAQ #5. Is renting to own worth it?

Every situation is different, thus every answer will be different for every home seeker looking to buy a home, whether its rent-to-own or a traditional home purchase. In order to make the best decision and finding the right property for you, ask as many questions as you can, find trusted real estate professionals, and never sign a contract you don’t understand. Happy home hunting!

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Anthony Cummuta

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