The Pros and Cons of Rent to Own Housing Options
Rent to own housing has become more attractive to those persons who are aspiring homeowners but are hindered by the problem of lacking down payment, a low credit score, among others.
This kind of arrangement benefits tenants in that they can lease a property while they look for ways through which they can purchase the property.
There, are, however, certain benefits and constraints associated with RTA which are described as follows:
What is this program called rent to own and exactly how does it function?
Rent to own agreements typically involve two components: lease and option to purchase and lease agreement.
Lease term remain vary from 1 to 5 years after which the lessee pays normal rent with some proportioned to be used to pay future price in lease.
But at the expiration of the lease term, the tenant has the right — but is under no legal requirement — to earn the property.
Two Types of Agreements:
Lease Option Agreement: This means that the tenant has the opportunity to buy the property but is under no pressure to do so at all.
Lease Purchase Agreement: The tenant is legally required to purchase the property once the agreed time on the lease agreement expires.
Option Fee: Generally, tenants are expected to commence the process by making a certain amount of money also called option fee or option consideration which is non-refundable.
This fee is earned in return for the ability to buy the home at the end of the lease period. Usually, it’s about 1%-5% of the home’s purchase cost.
Price Agreement: It is either set at the beginning of the lease agreement or mast be negotiated at the time of the lease expiry.
One major benefit of this arrangement is for people who require the needed time to establish their credit, save for a down payment, or perhaps gain experience with the homeowner process itself while being a resident in that home.
The Pros of Rent to Own Housing Options
Rent to own is an attractive solution for a rental home, especially for people in specific situations. Here are some of the key benefits:
1. Change for the property and territory testing
The benefits for the tenant of a rent to own agreement is that they are able to rent the home and live in the neighborhood before deciding whether or not to purchase the property.
This allows them to get ample time making calculations regarding the status of the property; the neighborhood; school systems surrounding the property; traffic congestion; and other factors, which contribute to lasting fulfillment.
2. Time to Improve Finances
For tenants who struggle to qualify for a mortgage due to a low credit score or insufficient savings, rent to own offers a grace period to address these challenges:
Credit Improvement: The lease period enables the tenant to access other ways of trying to correct their credit score in order to support their mortgage application.
Down Payment Savings: Some of the rent is usually paid in advance in order to be paid towards the down payment once the person is tenants the house.
3. Locked-In Purchase Price
Tenants involved in lease agreements that provide for determination of the purchase price at an agreed time will enjoy increases in property values.
In case the market starts to appreciate during the lease term the tenant can own the home at that cheap price and may get an instant equity.
4. Pathway to Homeownership
To clients who might never get a chance to own a house, rent to own offers a smooth approach to shifting from renting to owning.
Renters who would like to own a house; it gives them hope and a roadmap of how they can get there.
The Cons of Rent to Own Housing Options
However, rent-to-own housing bears many threats and challenges that a potential tenant should have in mind before entering the contract.
1. Non-Refundable Option Fee 2. Rent Premiums
In most cases the option fee and any rents paid in advance are non-refundable.
These are considered by the tenant if they do not buy the home, or they fail to get the financing at the end of the lease term.
This may prove very costly to the tenants who have to encounter a number of tricky situations.
2. Limited Flexibility
Rent to own agreements often lock tenants into specific terms:
If the tenant wants to be relocated or no longer interested in the property, he/she forfeits any amount that he/she paid for the same.
Under a lease purchase agreement, the tenant is under so much pressure to purchase the house regardless of deteriorating financial conditions, or loss of interest.
3. Ambiguity Related to Market Forces
The downside of this option is that if the housing market drops over the lease term and the purchase price was agreed when the lease was signed, then the tenant is likely to pay over the odds for the property.
On the other hand, if the price is pegged on the future market price, then the tenants may not afford the home if the prices skyrocket.
4. Maintenance Responsibilities
In most RTO deals, some or all of the maintenance and repairs duties normally performed by landlords in a traditional leasing scenario rest with the tenant.
This can be costly, particularly where, as in old buildings, substantive works are required.
5. Risk of Losing the Home
A tenancy agreement can be a bit blurry and tenants stand a high chance to lose their chances at an arranged purchase if they violate any clause, for instance, on paying the rent.
Furthermore, if the landlord fails to pay mortgages in the home, the home could be foreclosed, and the tenant has no protection under the law.
6. Financing Challenges
Since the homes are leased to Section 8 tenants, at the termination of the lease period, one is expected to obtain a mortgage.
If they are still bankrupt or their income is still low, there is a chance they won’t get the loan and in return, they risk losing the house and any deposits they made.
Conclusion: Is Rent to Own Right for You?
Housing by lease holding deals can help certain populations acquire property with a set timeline, as well as for people who do not have enough money for a down or cannot get a loan because of bad credit history.
They have the advantages that allow occupants to live in the home as they try to attain ownership and, because of rental prices and potential to lock in the purchase price, can be useful for the right individuals.
Nonetheless, the occurrence of life situations that make folks part with bundle of cash causes the rent to own business NOT suitable for everyone: justified by high non-refundable fees, gambling market, and possible loss of an investment.
Potential occupants wishing to secure a space in this manner must therefore take their time to consider the fine print of the contract, consult with attorneys and evaluate their economic position prior to entering into this bargain.
Therefore, rent to own can be a great shot for people who are well-organized, financially ready and willing to own a home.
When the advantages and disadvantages are well understood, the tenant will be in a reasonable position to make a decision that will suit his or her needs and circumstances.+
Also read: The Future of Co-Living Spaces in Affordable Housing