Rent To Own Homes Explained (PDF) by realestatetips4u


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                          Rent To Own Homes Explained

If you desire to own your own home but are unable to secure conventional financing today,
leasing a home with an option to buy may be your best option. A lease purchase can make
your rent money work for you instead of making your landlord rich. Typically rent to own homes
offer rent credits that reduce the final purchase price!

Here's how it works:

A home is made available via a standard lease with one important addition. Included is an
option to purchase that home at a specified price over a specified time period (usually one or
two years). In order to acquire that option, the renter/buyer must pay a one time, NON
REFUNDABLE, fee called the option consideration. The exact amount is negotiable, but it is
usually ranges from 2.5 to 7% of the purchase price. A fair contract will credit the buyer 100%
of that option consideration upon closing of the sale. Furthermore a negotiated percentage of
all rent payments should be applied toward the purchase price of the home. Some typical
terms and conditions one might expect to find in a contract follows:

In order to receive a rent credit of 50%, time is of the essence. You MUST pay your rent on or
BEFORE the due date of your lease (typically the 1st of the month). This means it must be
received by the lessor (landlord) on or before the due date. Any payment received after the
due date will result in a 0% rent credit for that month, a late fee may apply and you will not be
building any equity.
Maintenance is the responsibility of the Tenant Buyer. You are now renting to own and
homeownership requires maintenance. This includes things like broken windows from stones
or baseballs, clogged drains, peeling paint, broken appliances, burnt out bulbs, lawn
work/snow removal, etc. If any major repairs are required to ensure habitability, the owner
remains responsible.
You need to have Option Consideration. Option Consideration is typically 2.5% to 7% of the
purchase price of the home. It is a non-refundable payment, of which 100% is credited toward
the purchase price, which binds the lease purchase contract.

Here's an example transaction:

We have a nice 3 bedroom, 1 bath single family home located in a near west suburb of
Chicago in a great neighborhood with good schools and a strong community. It has been
freshly painted, cleaned, and is ready to move in. The purchase price will be $215,000.
Monthly rent payments will be $1,500 and you will receive a 50% rent credit ($750 per month).
You need between 2.5% and 7% in up front Option Consideration. Let's say your budget
allows for $6,000 for Option Consideration. This equates to approximately 2.8%
($6,000/215,000). You will also need $1,500 for the first months rent for a total initial payment
of $7,500.

Please note: Option consideration is not a security deposit. It is a non refundable payment
toward the purchase price and is 100% credited toward reducing the price of the home.
Now suppose you paid all your monthly rent payments on or before the due date and you
choose to buy the rent to own home at the end of the 12 month lease purchase contract. You

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will have $15,000 in equity before you even own the home! Here's the math:

Lease Purchase Price - $215,000

Less: Option Consideration paid at lease signing - $6,000

Less: 50% rent credit of $750/m * 12 months - $9,000

Net Purchase Price after credits - $200,000

You started with $6,000 and by paying your rent on time; your equity position grew 150%
(another $9,000) for a total of $15,000 with 12 months. Not a bad deal! Many people find it
nearly impossible to save $9,000 in a year with all the costs of living constantly on the rise.

What's the catch?

Now you may be thinking, "OK, what's the catch? This sounds too good to be true."

Answer, there is no catch.

There are many possible reasons a landlord/seller may want to enter into a rent to own
agreement. Some reasons may be:

Needs to maintain ownership for at least one year for tax purposes.
Unable to get a fair price due to local conditions.
Tired of performing minor maintenance.

Furthermore, when one sells a home through a realty service, a commission of 5-7% is
typically paid. In the example above, this can cost more than the rent credit. Since realtors are
usually not involved with this type of transaction, there is no commission and the landlord can
afford to pass along the savings to tenant/buyer in the form of rent credits.

Also, when the Tenant becomes the Tenant Buyer (via rent to own), there is an immediate
sense of pride in ownership. Tenant Buyers add value to the community. They take care of
their future property, make improvements, and feel good knowing their rent money is working
for them (reducing the purchase price) rather than just making their Landlord rich.

There are also many advantages for the renter:

Build equity toward home ownership.
No bank or finance company involvement.
Poor credit history may not be an issue.

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