How The Process Works
As with most homebuyers, you’ll need a mortgage to finance the purchase of a new house since most don’t have the funds sitting around to pay cash up front. Also, to qualify for financing, you must have a good credit score and cash for a down payment. Without these, the traditional door to homeownership may be shut.
There is an alternative in Surprise and Phoenix, however: a rent-to-own agreement, in which you rent a home for a certain amount of time, with the option to buy it before the lease expires. Rent-to-own agreements typically consist of two parts: a standard lease agreement and an option to buy.
Here’s a rundown of what to watch for and how the rent-to-own process works in Arizona. It’s almost as easy as renting with a few more complexities and responsibilities, so you’ll need some to educate yourself on the process in order to protect your interests. Doing so will help you figure out whether the deal is a good choice if you’re looking to buy a home.
KEY TAKEAWAYS
• A rent-to-own agreement is a deal in which you commit to renting a property for a specific period of time, with the option of buying it before the lease runs out.
• Rent-to-own agreements include a standard lease agreement and also an option to buy the property at a later time.
• Lease-option contracts give you the right to buy the home when the lease expires, while lease-purchase contracts require you to buy it.
• You pay rent throughout the lease, and in some cases if agreed upon, a percentage of the payment is applied to the purchase price.
• With some rent-to-own contracts, you may have to maintain the property and pay for repairs, pay insurances and taxes just like you were the owner.
What Are Rent to Own Homes?
Rent-to-own homes are homes that include a clause in the rental agreement which either gives you the option to buy or an obligation to buy after a certain time period. You make rent payments each month and a portion of those payments can count toward your down payment. Should you decide to buy, the excess money can be applied to the home purchase.
Renting to own can be an appealing concept for people who are interested in owning property but have thus far been shut out of the traditional homebuying process. If you don’t have a sizable down payment, for instance, or your credit score is too low to qualify for a mortgage, renting a property with the intention to buy it can give you time to save and work on improving your credit rating.
Nonrefundable Upfront Fees
In a rent-to-own agreement, you (as the buyer) pay the seller a one-time, usually nonrefundable, upfront fee called the option fee, option money, or option consideration. This fee is what gives you the option to buy the house by some date in the future. The option fee is often negotiable, as there’s no standard rate. Still, the fee typically ranges between 1% and 5% of the purchase price.
Lease-Option vs Lease-Purchase
It’s important to note that there are different types of rent-to-own contracts, with some being more consumer friendly and flexible than others. Lease-option contracts give you the right, but not the obligation, to buy the home when the lease expires. If you decide not to buy the property at the end of the lease, the option simply expires, and you can walk away without any obligation to continue paying rent or to buy. This is not always the case with lease-purchase contracts.
To have the option to buy without the obligation to buy, it needs to be a lease-option contract.
Watch out for lease-purchase contracts—you could be legally obligated to buy the home at the end of the lease, whether you can afford to or not.
Steps to By a Rent-to-Own Home in Surprise or Phoenix
Entering into a rent-to-own agreement typically means signing a formal legal contract. The contract should specify the terms of the agreement and whether you’re obligated to buy the home or simply have the option to do so. There are several key pieces of information that a rent-to-own agreement should generally include.
Agreeing on the Purchase Price
Rent-to-own agreements should specify when and how the home’s purchase price is determined. In some cases, you and the seller will agree on a purchase price when the contract is signed. This locks in the price of the home and even though it may increase in purchase value, your home purchase price does not increase. In other situations, the price is determined when the lease expires, based on the property’s then-current market value. Many buyers prefer to “lock in” the purchase price, especially in markets where home prices are trending up.
Applying Rent to the Principal
You’ll pay rent throughout the lease term timeframe. The question is whether a portion of each payment is applied to the eventual purchase price. As an example, if you pay $1,200 in rent each month for three years, and 25% of that is credited toward the purchase, you’ll earn a $10,800 rent credit ($1,200 x 0.25 = $300; $300 x 36 months = $10,800). Typically, the rent is slightly higher than the going rate for the area to make up for the rent credit you receive. But be sure you know what you’re getting for paying that premium.
Paying a Small Down Payment Up Front
In some contracts, a small down payment is paid up front while you can live in the home, treat it as your own and build up a better credit rating throughout a specific lease period before completing the sale. This down payment is applied at closing when you are ready to get a bank loan. This type of rent to own agreement takes a good working relationship between the owner and the renter-buyer because the owner-investor has a vested interest in your successfully qualifying for your home loan. Think of it as a 3 to 5-year qualifying period where you still get to live in the home as you make it your own.
Options To Buy Rent to Own Home
Some contracts require and “option to buy” where all or some of the option money you must pay can be applied to the eventual purchase price at closing. This option money is usually paid up front or throughout the term of the lease and again, is applied towards the purchase price or the down payment.
Rent-to-Own Maintenance
Depending on the terms of the contract, you may be responsible for maintaining the property and paying for repairs since you are on a trial ownership you’ll need to understand and practice all of what it means to be a full homeowner. With rentals some of the repairs are the landlord’s responsibility, so read the fine print of your contract carefully. Because sellers are ultimately responsible for any homeowner association fees, taxes, and insurance (it’s still their house, after all), they typically choose to cover these costs, but not always. Again with many rent to own scenarios, you as renter are taking on a much higher responsibility with this home, especially if your agreement is so that you can improve your credit score, establish steady employment record, save for more downpayment. Either way, you’ll need a renter’s insurance policy to cover losses to personal property and provide liability coverage if someone is injured while in the home or if you accidentally injure someone.
Be sure that maintenance and repair requirements are clearly stated in the contract. Maintaining the property, e.g., mowing the lawn, raking the leaves, and cleaning out the gutters, etc., is very different from replacing a damaged roof or bringing the electrical wiring up to code. Whether you’ll be responsible for everything or just for mowing the lawn, have the home inspected, order an appraisal, and make sure the property taxes are up to date before signing anything.
Buying the Rent-to-Own Property in Surprise or Phoenix
What happens when the lease contract ends depends partly on which type of agreement you signed. If you have a lease-option contract and want to buy the property, you’ll probably need to obtain a mortgage (or other financing) in order to pay the seller in full.
Conversely, if you decide not to buy the house—or are unable to secure financing by the end of the lease term—the option expires and you move out of the home, just as if you were renting any other property – or renew for another term. You’ll likely forfeit any money paid up to that point, including the option money, downpayment money and any rent credit earned, but you won’t be under any obligation to continue renting or to buy the home.
If you have a lease-purchase contract, you may be legally obligated to buy the property when the lease expires. This can be problematic for many reasons, especially if you aren’t able to secure a mortgage. Lease-option contracts are almost always preferable to lease-purchase contracts because they offer more flexibility and you don’t risk getting sued if you are unwilling or unable to buy the home when the lease expires.
Treat the process the same as you would if you were outright buying a home: Do your due diligence, research the area, compare prices with other nearby homes, research the contract, and research the seller’s history.
Who Are Rent-to-Own Homes Right For?
Getting Read Financially to Buy Rent-to-Own Home
A rent-to-own agreement can be an excellent option if you’re an aspiring homeowner, you want to move into a particular neighborhood for the schools, but aren’t quite ready, financially speaking. These agreements give you the chance to 1) get your finances in order, 2) improve your credit score, and 3) save money for a down payment while “locking in” the house you’d like to own. If the option money and/or a percentage of the rent goes toward the purchase price, which they often do, you also get to build some equity.
Lack of W-2 Income As Barrier to Buying A Home
A second group of candidates who may be a perfect fit for buying Surprise homes the Rent To Own way are small business owners who may not have standard W-2 income. Small business owners historically had to rely on the fact that they had plenty saved up in cash, but no “proof” of steady income through an employer since they were their own employer. Tax records weren’t of much use since being a small business owner allows for so many deductions that it looks like they are not making enough to qualify for the financing. Even if they are, to the banks, they are not good qualifiers on paper.
As home prices rise and more and more, even financially capable people can have trouble obtaining financing in these markets especially due to mandated strict automatic underwriting guidelines and 20% to 40% down-payment requirements. Anything unusual—in income, for example—tosses good income earners into an ‘outlier’ status because underwriters can’t fit them neatly into a box. This includes people who have nontraditional incomes, are self employed or contract workers, or don’t have a U.S. credit history (e.g., foreign nationals)—and those who simply lack the huge 20% to 40% down payment banks require for nonconforming loans.
Before You Sign The Contract
Signing off on a rent-to-own agreement can create certain legal obligations both for you and the property seller. Here are a few additional tips to consider before you sign.
Choose the Right Terms
It’s important to read the fine print on a rent-to-own agreement to understand whether it’s lease-option or lease-purchase. Since Fresh Start Homes AZ is extremely hands on with its clients Fresh Start Homes AZ will ensure through sit down conversations that all details of such an agreement are clear and understood.
Get Help
Hiring a qualified real estate attorney to explain the contract can help you understand your rights and obligations in a rent-to-own agreement. You may want to negotiate some points before signing or avoid the deal if it’s not favorable enough to you.
Research the Contract
Rent-to-own contracts can be complicated and it’s vital that you understand all the finer details. For instance, take time to review:
• The deadlines (what things are due and when)
• The option fee or down payment fees plus rent payments–and how much of each applies toward the purchase price
• How the purchase price is determined
• How to exercise your option to buy (for example, the seller may require you to provide advance notice in writing of your intent to buy)
• Whether pets are allowed
• Who is responsible for maintenance, homeowner association dues, property taxes, and the like
• What “maintenance” means: just mowing the lawn and raking, etc. or serious repairs, such as fixing a roof.
Research the Home
It’s essential to perform certain due diligence before buying any home, including rent-to-own properties. Ordering an independent appraisal, obtaining a property inspection, making sure the property taxes are up to date, and ensuring there are no liens on the property can help you make an informed decision about whether you should buy the home.
Research the Seller
Working with the right seller can make a rent-to-own experience a positive one and it’s helpful to look into the property owner’s background before committing. At Fresh Start Homes AZ we pride ourselves not only on our knowledge and experience in rent-to-own home ownership, but with our excellent customer service, our integrity with both our homes and our long term tenant and buyer relationships. We have deep relationships in the community and maintain a rigor with treating people with respect and always putting our renters’ and buyers’ best interest first.
Ask the Right Questions
If there’s anything you’re unsure of with a rent-to-own agreement, it’s better to ask questions sooner rather than. later. For instance, it’s a good idea to know under which conditions could you lose your option to buy the property. Under some contracts, you lose this right if you are late on just one rent payment or if you fail to notify the seller in writing of your intent to buy.
How Is Rent-to-Own Different Than Buying A House in Surprise or Phoenix?
Renting to own is basically a hybrid approach to buying a home where all or a portion of a lease payment goes to building equity in a home over time. It is usually a process by which the owner of a home allows a renter to build equity without having to make a large down payment or secure a mortgage. Fresh Start Homes AZ works closely with its renter-buyer-clients all throughout the buying term to ensure a successful home owner and purchasing experience.
What Are The Advantages of Rent-to-Own Agreements?
Renting to own can allow a person to begin building equity in a home they like without having to take out a mortgage or come up with a large down payment. This can be especially beneficial for those without the financial means to make a down payment due to lack of savings or qualify for a mortgage due to low credit scores or lack of enough consistent employment, or for a licensed professional (doctor, lawyer, architect, engineer) just starting out their professional practice and have not been employed for two consistent years.
What Should Be Considered When Renting to Own?
Rent to own contracts can vary significantly and require due diligence on the part of the renter. It’s important to research the contract (possibly with the assistance of a real estate attorney), research the home (with an appraisal and inspection) and research the seller.
The Bottom Line
A rent-to-own agreement allows would-be home buyers to move into a house right away, with several years to work on improving their credit scores and/or saving for a down payment or building an employment history before trying to get a mortgage. Of course, certain terms and conditions must be met, in accordance with the rent-to-own agreement. Fresh Start Homes AZ has the trusted track record in Surprise and the greater Phoenix metro for successfully helping families find affordable solutions both selling their homes and buying through the rent to own method.