Pros and Cons of Lease to Purchase Agreements
During the recent recession, several potential homebuyers got cold feet. The market is too volatile. Home prices are unstable. I am not extremely confident in my job and hesitant to put down roots. All of these are excuses would – be homeowners had to avoid taking steps toward the purchase of a property.
In many areas, this led to an increase in rental property occupancy. For some, simply renting was not ideal. Short – term contracts and rent payments simply going down the drain, not being put toward any long – term residential option. For these individuals, rent or lease to own agreements may have come into play.
While there are several great benefits to rent to own agreements, there are downsides, as well – for both the renter (potential homeowner) and the seller.
Rent to own options typically last for two to five years, and at the conclusion of the term, the standard home buying process is put into action. But the buyer does have the option to back out in the end, choosing not to purchase the property. This fail – safe gives many renters a sense of security.
Lease to own options also give the renter the opportunity to build savings toward an eventual down payment. While not all of the rent goes toward your down payment – your lender will determine the exact amount that goes toward both your down payment and additional fees, such as closing costs – some does. In a traditional rental, none of your monthly payments go toward helping you save for a permanent residential option.
Renters can also build a good credit record while making payments during a lease to own option.
Another benefit for the renter is the fact that leasing gives he or she the opportunity to test out the community and its amenities before committing to living there long term.
Sellers benefit from having a more invested, caring renter, one that will maintain the property for his or her own future.
While the seller benefits from a more serious – minded tenant, he or she does have to shoulder the risk of the renter possibly opting out at the end of the rent to own term.
Sellers also have to think about market fluctuations. When the terms of the lease to own agreement are set, at the beginning of the term, the home price is set, too. If it rises more than expected during the rental period and the renters decide to buy at the close of the term, the seller can lose substantial amounts of money.
This could have an adverse effect on renters should the home value drop drastically while they rent the property.
Renters also have to be careful of a few things. One, many lease to own options don’t allow late payments to go toward the costs of your down payment. Two, the terms of home maintenance, repairs and property upkeep can be tricky. Typically, renting a property allows you the freedom to call a maintenance company for low or no – cost fixes in the home, but this is sometimes not the case when you’re renting to own.
Forbes gives this final advice on lease to own options: “They can be helpful for those sitting on the fence but shouldn’t be utilized by anyone who isn’t serious about eventually buying the home. Rent-to-buy should be made as part of a plan to own a home, otherwise it will end up costing more money in fees and above-market rent payments. Make sure the eventual purchase is driving the decision to enter a rent-to-buy.”