In the current real estate market where houses are slow to sell and buyers face tough requirements to secure a mortgage, rent-to-own real estate agreements are becoming more popular.
In these agreements, the lease includes the option of the property being purchased for a designated price within a specified time period—usually less than two years. The rent that was paid during that timeframe will be applied to the home price.
“The rent to own option is a lot more popular these days,” says Matt Brown, director of business at ForSaleByOwner.com. “It’s a lot harder to get a loan, and a lot harder to sell your house. If you need to move, getting the rent-to-own option is definitely attractive.”
And while the option has become more prevalent in a post-crisis market, it is not without risks for the seller. Sellers run the risk of the agreed upon price being too low if the house appreciates more than expected in the selected time frame. Not to mention, the buyer still might not be able to afford the home when the lease is up—forcing sellers to put the home back on the market.
But experts say there are steps sellers can take to incorporate safeguards into the rent-to-own contract.
According to Les R. Kramsky, a real estate attorney in Marlboro, N.J. and general counsel to The Money Store, since the seller can’t market the home to anyone else during the lease period, it’s common for sellers to require a down payment of 1% to 5% of the sale price , called an "option fee." If, at the end of the lease period, the renter buys the house, the option fee is applied to the down payment. If the renter does not buy the house, the seller keeps the fee.
He also advises sellers aim to sell the house for 5% to 10% more than the current market price to cover any appreciation in the home value.
In addition to that down payment, Kramsky recommends including a rent premium into the monthly rent. For instance, sellers might want to add $300 on a $1,000-a-month rent that would be applied to the purchase or down payment of a house if sold, but kept if the deal falls through.
Sellers can even have the buyer agree to handle all home repairs and maintenance, placing the burden on the renter if anything goes wrong with the house, and alleviates the need for the seller to act as landlord.
While Kramsky says it’s not common from renters to walk away from a rent-to-own deal, it does happen, particularly if they don’t qualify for a mortgage at the end of the lease term. “Maybe they lose their job or maybe they are relocated or were unable to save money. There are many factors,” he says.
For buyers, a rent-to-own contract means they miss out on the record-low mortgage interest rates currently available.
“There are a lot of legitimately good buyers out there that hare having credit issues,” says Brown. He says this gives them a chance to rebuild their credit and purchase a home down the road. “There are more buyers seeking it. There’s definitely demand from the buyer side.”
And since the buyers are looking for that option, Brown says it’s a good way for sellers to stand out in a crowded real estate market and potentially sell their home in a quicker time frame. “This is something people should consider,” says Brown.