Rent to Own and Contract Sales
Rent to Own
The purpose of this document is to provide you with enough information to decide whether a "Rent to Own" agreement would work well for you, whether for one of my or someone else's houses.
Typically "Rent to Own" a house means a contract between you and the house's owner which usually provides for some combination of the following:
1) You agree to a price at which you can buy the house.
2) You pay the owner some sum of money upfront which, if you buy the house, is applied to the down payment on the house.
3) Every month you pay the owner money, often more than what the house might normally rent for, with the excess being applied towards the down payment on the house, if you indeed buy the house.
4) You must buy the house (which means getting a loan from a bank) within an agreed time period, often one to five years. If you do not or are unable to get a bank loan by the agreed date, the owner can keep all the money you have paid. You do not own the house until you get the bank loan.
5) Either you or the owner will be responsible for repairs to the house between the time the agreement starts and the day you get a loan from the bank to buy the house from the owner. Of course it is better for you if the owner is responsible for repairs until you get the bank loan.
When you get a loan to buy a car, the payments are set up so that you pay off the loan in 2-5 years. When you get a loan to buy a house, the loan is typically set up so you pay off the loan in 15-30 years. One reason an owner creates a "Rent to Own" arrangement, especially item 4) above, is that the owner does not want to act as your lender for 15-30 years. The advantage to getting the bank loan, is that your monthly payment will be approximately 2/3 of what rent on a similar house would be, and no one can raise your rent once you own the house. Thus if you enter into a "Rent to own" agreement, you should try to get a loan from a bank as soon as you can.
You should only enter into a "Rent to Own" agreement if you want to buy the house and you are confident that
(a) If you lack a down payment, you can save enough money either from the accumulated credits described in 2) and 3) above and/or by saving on you own.
(b) If you have credit problems, you know you can correct them.
You must feel confident that you can satisfy (a) and (b) several months before the date by which your "Rent to Own" agreement requires you to get your own loan.
Before entering into a "Rent to Own" agreement, you should chat with a bank loan officer so you can determine if you have any credit problems to be repaired, and, based upon your income, how much of a loan you can afford. If at the time you actually seek a loan, interest rates have increased and your income has not increased, you may then only qualify for a smaller loan.
When you get loan to buy a house, you typically need a minimum of 5 percent of the purchase price of the house. For a $70,000 house, this would be $3500.
Finally before entering into a "Rent to Own" agreement, you should be confident that the agreed upon price of the house is reasonable. If the bank determines that the agreed upon price is more than the house's value, you will not get the loan, and you could lose all the moneys you have paid towards the down payment.
How I do Rent to Own
We will agree upon a purchase price and a date by which you must get a loan. I will rent the house to you for $0-$200 a month more than the rent of the house would otherwise be, with any excess being credited towards the downpayment when you get your loan. I will remain responsible for all repairs, since legally I am renting you the house.
If I believe that you will not be able to save enough for a downpayment or have good enough credit to get a loan, I will not make a "Rent to Own" agreement with you.
If the bank determines that the house is less than the price we agreed upon, I will either accept the lower price, or refund all the the extra money you paid me.
If we create a "Rent to Own" agreement, before signing it with you, I will satisfy myself that you fully understand it.
If you happen to have a downpayment of at least $3-4000, I might make a contract sale with you. This means that you would immediately become the owner of the house with the benefit of the lower monthly payment, and would make payments to me. You would be responsible for all repairs. You will still have to get your own bank loan by an agreed upon date, typically within 3-5 years. If you fall behind more than 2 payments or fail to get a bank loan by the agreed upon date, I would have the right to quickly take back the house, make you move out, and keep all the money you have paid me.