Rent-to-own is in simplest terms is where a purchase agreement is written and agreed to by all parties with an extended closing date. In the meantime rental terms are also mutually agreed then all parties wait for the closing date specified in the purchase agreement with the tenant/buyer paying rent each month. Often times it is agreed that a portion of the monthly rent goes towards the down payment at closing. This arrangement makes the rent to own option more attractive to the owner. For example, in a home with a normal market rent of $1,000, the tenant agrees to pay $1,200/month instead with the extra $200/m being applied to the down payment and/or closing cost at the time of closing. In this arrangement, if the tenant/buyer is not able to close, the owner keeps the entire amount of rents collected. If it was a one year agreement, that owner would have collected $2,400 more than they could have simply renting the property out with no rent-to-own terms. If the tenant/buyer does close, the owner then agrees to fund $2,400 towards the down payment and/or closing cost. Normally any earnest money is also either forfeited in the event of failure to close or applied to the down payment if the buyer does close.
Other considerations are who pays for repairs as the need arises? Will a rent-to-own arrangement change the lending requirements when obtaining a loan? Also, you will need to get the property licensed as a rental with the city along with meeting their fairly strict requirements when it comes to egress windows, etc.
Under the right circumstances rent to own can be a viable option but in reality, it is rarely utilized due to the difficulty in finding a suitable tenant who is willing AND able to buy the home at the end of the agreement. If you engage in a rent-to-own arrangement make sure you have considered all the dynamics with your REALTOR, tax advisor, the Building Safety Department with your city and an attorney.... more