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What You Should Know About Rent-to-Own Transactions

Rent to own is a technique that allows buyers who cannot gather a large down-payment or secure a mortgage the opportunity to make payments on their home. This type of owner financing is also useful for sellers who want to get their home off the market but are unable to find an eligible buyer. It expands the number of potential buyers and often gives sellers the opportunity to receive the full asking price or higher monthly rent for their property.

Operation of Lease to Own

A lease to own (or rent to own) works in the following manner:

  1. The lease of a property is combined with an option to purchase within a specified number of years (usually around three years or less) at a named price;
  2. The renter sometimes pays a non-refundable “option fee” which is between one to five percent of the total price;
  3. The renter will pay the monthly rent plus a premium that is credited to the purchase price.

Seller Benefits

Lease to own benefits sellers because they are more likely to get the full asking price and receive higher monthly payments because the seller is providing financing to the buyer. The seller then avoids paying for an unproductive property that could be on the market for months before a buyer is secured and the deal is closed.

Sellers achieve monthly cash flow to offset expenses, a higher sale price, and lower risk because a buyer is secured. Moreover, “rent to own” buyers are typically better tenants who are more likely to care for the property because it will eventually become theirs.

Buyer Benefits

Lease to own also benefits buyers. In rent to own deals, buyers have lower out of pocket expenses, their payments are credited to the price of the home, they gain the benefit of equity growth, and they can take advantage of the mortgage interest deduction and other tax benefits that come with homeownership. Moreover, leasing to own combines the flexibility of renting with the control that comes with owning a home.

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