Big Ron, Other/Just Looking in Northeast Philadelphia...

what is rent to own & how does it work?

Asked by Big Ron, Northeast Philadelphia, Philadelphia, PA Tue Feb 1, 2011

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Bruce Lang’s answer
This is a very good questions as few understand it. I naive answer is that whatever is paid in rent gets applied towards the purchase. In fact, rent to own is all about the detail of the contract. The real question is what percent of the rent applies towards the purchase?
In some cases, the buyer simply needs to accumulate cash.... Lets say the 3.5 percent required for a FHA sale. So in that case' a rent to own contract can be part of getting there. In other cases the seller "acts like a bank" and if the contract is well written after x months rent (maybe 360 of them) then the renter will complete the deal and then will receive title. I gave two extreme here and the develi I in the details. These types of agreement are best written or reviewed by attorneys.
0 votes Thank Flag Link Tue Feb 1, 2011
There could be many pitfalls with a rent to own sitution, therefore inform yourself well beforehand, and consider consulting with an attorney who specializes in real estate--the process can best be described as similar to that of a car lease; generally a predetermined sale price has to be agreed upon, rent payments are slightly higher, however, if at the end of the agreed time frame you decide to purchase the property, a portion of the agreed and already paid rent gets credited back towards a downpayment--again, inform yourself well and consult with an attorney.
0 votes Thank Flag Link Tue Feb 1, 2011
It works best for the owners, keep that in mind.

You find a house, agree to purchase the house at a price a year or two from now. You put down a security deposit that you will loose if you don't buy when the contract says and you pay a monthly amount as rent each month. On top of the rent you will add an option fee of $100-$200 or whatever you agree on and the owner keeps that option fee each month to add to the deposit as your down payment when you purchase in a year or two.

The problems occur when you can not buy in a year or two for whatever reason. The owner then can keep your option money and deposit and out you go. Its better for the seller than you. What makes it worse is that prices have been going down and in a year the values could be lower, a bank might not even allow you to borrow then if the purchase price is too high which will force you to put down even more money or walk away.
I would urge you to avoid rent to own and just save and get in a position to buy when you can.
0 votes Thank Flag Link Tue Feb 1, 2011
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