Not everyone is financially capable of buying a real estate property the moment he/she starts looking for one. Some might live in overpriced cities or neighborhoods which makes it extremely difficult to purchase a property. But what if there was an option that gives a potential buyer the opportunity to purchase the home later, based on a contract signed between him/her and the seller. It would be a lucrative offer for all parties involved, considering the gains as well as the risks. The strategy, known as rent to own house, is becoming a much favored one in today’s real estate market.
Rent to own house is a strategy that basically favors the buyer more than the investor, for various reasons. A buyer who is unable to afford a real estate property in cash or who does not qualify for a mortgage due to a bad credit score might find rent to own house a good option to plan for a real estate investment. The concept works in a contract form, where a tenant agrees to rent a property with an optional purchase clause that can be activated before the expiry of the lease contract. This gives the tenant enough time to work towards saving enough money or improving his/her credit score to be able to purchase the property for the price agreed upon beforehand.
Related: Why You Should Buy an Investment Property While Renting
Pros and Cons of the Rent to Own House Investment Strategy
Option Consideration
This clause, which is usually common in rent to own house agreements, specifies that a potential buyer must pay the seller a one-time non-refundable fee. The amount that gets paid is like a guarantee for the seller that might force the potential buyer to exercise his/her right to purchase the property at the end. It is sort of like a security deposit for the seller because he/she will be putting his/her property off the market for the potential buyer. The option money rate ranges between 2% and 7% of the total purchase price of the property. Depending on the type of contract, that fee can be eventually deducted from the final purchase price of the property.
Real estate investors must be aware though that the wording in rent to own house agreements is very delicate. Having a lease purchase clause in the contract means that the tenant is obligated to buy the property when the lease period ends. This is why it’s advisable to hire a real estate attorney before signing any rent to own contracts.
The option money can serve as a double-edged sword for both parties of the agreement. Either the buyer pays a small amount for a property that can have a higher price later, or he/she is unable to afford the property and thus loses out on the fee he/she has paid already.
Related: Lease to Own Option and its Pros and Cons for Buyers and Sellers
Purchase Price
Determining a purchase price years before the market as a whole progresses can be a very tricky step for a seller, yet a very good option for the buyer. Buyers always try to lock down the purchase price at the beginning of the contract in order to have a more realistic chance of buying a real estate property that could rise in value later at an affordable price. For example, a property that is worth $100,000 today has a purchase price of $120,000 in the rent to own house agreement, and that same property 3 years later might have increased in value, making it worth $160,000. That would mean that the buyer has already made a $40,000 profit on that real estate property.
Purchase prices in rent to own contracts seem to always favor the buyer considering how the real estate market is going recently. The market is booming, and prices of houses are rising, making this real estate strategy a good option for investors.
Sellers Can Miss Out
If you are planning to purchase an investment property and then use it for a rent to own house strategy later on, then you must be aware of the risks that come with it. Renting the property for 1-3 years and having an optional purchase option might sound stable and financially secure. However, it is far away from that if you consider the different scenarios. For example, the potential buyer who signed a rent to own agreement with you as a seller might be unable to afford the property after the lease contract expires. This means that while you might have gained the non-refundable fee (option money), you might have lost on many other opportunities to sell the property for the same price, if not a better one.
Renting the property for a number of years to a potential buyer puts your property off the market for a while. So, if a buyer comes along offering a better price, you are legally not allowed to sell it even if you want to because an agreement is already in place with the rent to own buyer. What could potentially add more insult to injury is the fact that you could be selling the property for way lower than its actual value at the time of the lease expiry.
Related: Buying Investment Properties With No Money
Can Be Financially Disastrous for Buyers
There is no denying that a rent to own house agreement can prove catastrophic for buyers. Potential investors who are looking to get into real estate by investing in a rent to own house but not being financially able to can suffer a lot. The one-time non-refundable fee is a hefty sum, so what if you are unable to afford to pay the property in cash or get a mortgage to buy the property at the end? Losing that sum can prove to be financially damaging for the buyer’s long-term plans of becoming a house owner or a real estate investor. This is why it is important to study the plan carefully and to know your future financial capabilities. Without having previous knowledge on how your finances will play out, the rent to own house strategy might prove to be too risky a move.
Conclusion
The rent to own house strategy is not a complicated one. In fact, it is a rather simple one that can be beneficial to one side and negative to the other. However, the state of the current real estate market means that investors looking to purchase properties through rent to own house agreements are more likely to benefit. This is due to rising property properties as well as due to an improving economy, which allow purchasing the property at the end. For sellers, it is hard to understand why one might go through the path of rent to own house unless it is absolutely the last option available.