When the housing market was booming, these options were few and far between. But with the market now moving more cautiously you may see more and more opportunities as a buyer and a seller.
First, let’s take a quick rundown of the basics
If you’re a seller thinking about turning your home into a rent-to-sell property, you first need to set a fixed rent and sale price. These should be negotiable, just like normal home prices, but keep in mind that once that agreement is signed, the sale price is locked into place for the length of the rental term, regardless of how the market changes.
There are a few other special differences. In addition to the rent, the renter is going to have to pay an upfront option fee, which will be put toward the down payment if the renter decides to buy the house and kept by the seller if the renter moves on. On top of that, the renter will also have to pay a rent premium, or an amount in addition to the rent that will go toward the down payment.
The term of the rental agreement tends to be 1 to 5 years, at the end of which the renter has the option of buying the home at the agreed upon price with the down payment partially funded.
If done right, this sort of deal can prove beneficial to both sellers and renters.
Rent-to-own can be a great plan B for sellers having a hard time getting a bite on their property. Houses still aren’t selling as fast as they did pre-2007, and if you’ve already moved into a new home, there’s a good chance you’ll be stuck paying two mortgages. A rent-to-own agreement could easily keep you above water for now and net you a sale later down the road.
Renters (slash potential buyers) benefit too. If you don’t have a great credit score, the rental period gives you time to build it up. Similarly, if you don’t have the funds saved up for a down payment, rent-to-own can be a smart way to put money toward one.
…and the Negatives
No surprises here—there are potential downsides for both the seller and the renter.
If you’re the seller, you have to abide by the contract even if the value of your home rises, or if someone makes an offer to buy it out right. If the renter backs out, you’re also back to square one, and potentially stuck with mortgage payments on a second house.
On the renter end, making a late rent payment often voids the option fee for that month, which will take a chunk out of your eventual down payment if you’re late a few times a year. If you decide not to buy the house, you won’t be able to get your option fee back, which means you may be out thousands of dollars.
There have also been cases of less-than-legit sellers offering rent-to-own options on houses under foreclosure. In this scenario, the bank gets the home and the renter is out their option fee and premium. Know what you’re getting into, and there should be no reason why both buyer and seller don’t benefit.