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Chapter 4: Rent to Own Homes Frequently Asked Questions

Although rent to own homes have been available for some time, many people are still unfamiliar with this non-traditional buying option. Many potential homebuyers find themselves asking questions about the lease option process and some of the important terms surrounding it. Buyers can refer to these Frequently Asked Questions and their answers when going through the process of signing a contract on a rent to own home. Keep these helpful answers handy as a guide to this popular home buying process.

Q. How do rent to own homes work?

A. Rent to own homes allow homebuyers to lease a home while reserving the option to buy the home at any time either during the period of the lease or the end of the lease. During this stretch of time, the homeowner’s hands are tied and they are not permitted to advertise the residence as for sale after entering an agreement to sell it to the prospective buyer.

There are two sections to a rent to own agreement. The first section establishes what the monthly rental payment will be. The second section of the rental agreement establishes that the homeowner is bound to sell the residence to the prospective purchaser at a predetermined price.

Q. What is the option fee?

A. An option fee is often confused with a rental security deposit, although they are not the same. This fee is paid up front at the start of the lease. In most cases, the option fee is not refundable at all, something that potential homebuyers should keep in mind.  Whether or not the prospective homebuyer decides to go ahead and buy the residence in question, the seller will still keep the fee. In some specific kinds of rent to own homes agreements, this particular option fee is applied to the buying cost of the home.

Q. How much will the option fee cost?

A. The option fee is an integral part of lease to own agreements. According to the SF Gate website, a usual option fee falls between three and five percent of the agreed upon buying price. Of course, this is just an average figure, so it can vary, depending on each unique situation. The good thing about rent to own homes is that the parties involved may negotiate the amount of the. Usually, sellers are attracted to homebuyers that can put down more money on the home.

Furthermore, the more cash that homebuyers contribute as part of the option fee, the less they will need to finance elsewhere when the lease expires and they are ready to purchase the home.

Q. What is monthly rental credit?

A. Many rent to own agreements feature a provision that sets aside a fraction of the monthly rental payments as credit toward the purchase price of the residence. This amount varies from situation to situation, yet it may be as great as up to 50 percent of the rental payment. This provides homebuyers with the benefit of creating equity while renting.

Q: Which Party pays for the homeowner insurance and the real estate taxes on the rent to own residence?

A: The party paying for both the homeowner insurance and the real estate taxes on the rent to own home is usually the seller of the property. Of course, once the homebuyer makes the purchase and takes possession of the home, the taxes and insurance costs will then be their responsibility.

Q: What should consider rent to own homes?

A: Many individuals find rent to own homes an attractive option. Previous sales have shown that the following people often consider lease option properties:

  • Homebuyers who like to invest in real estate
  • Homebuyers fed up with being just renters and want to head toward real homeownership
  • Homebuyers that want to try out a new school district or a new neighborhood prior to making a commitment to it in the long term
  • Homebuyers dealing with damaged credit and who may be currently incapable of qualifying for appropriate mortgage rates because of credit problems
  • Homebuyers who need and want time to get their finances in order before making a home purchase

Q: Is there an obligation on the part of the renter to purchase the home at the close of the lease period?

A: No, there is absolutely no obligation on the part of the renter to purchase the home at the close of the lease period. The seller gives the homebuyer the first option of buying the home, yet the ultimate decision of whether to purchase or not to purchase is totally up to the renter.

Q: Are the down payment and the monthly rent credits going to be given back to the renter if he or she refuses to go through with purchasing the residence at the close of the lease period?

A: The down payment and the monthly rent credits are going to be non-refundable. If one refuses to take advantage of the buying option, then previously money probably will not be returned. This feature of rent to own homes should carefully considered by buyers before entering a lease option agreement.

At a Glance

  • Rent-to-own homes are based on a lease of a residence with an option to eventually buy the residence;
  • The option fee will be paid up at the start of the rental period;
  • The option fee usually falls between three and five percent of the predetermined buying price;
  • The monthly rental credit is a fraction of the monthly rental payments that is put aside to go toward the purchase of the home;
  • The seller of the home pays for the homeowner insurance and the real estate taxes, then the renter/buyer eventually does;
  • Rent to own homes are great considerations for many individuals;
  • There is no obligation put on the renter to actually buy the home at the close of the lease-to-own period;
  • Neither the monthly rental credits nor the down payment are to be refunded to the renter.

Rent to own homes are a great option for many home buyers.

Next: Figuring out a budget