What is Rent-to-Own?
Rent-to-Own (RTO) is an agreement between a landlord and tenant in which the tenant agrees to rent the property for a certain period and has an option to buy before the lease expires. It’s essentially a hybrid approach to owning a property. You get to experience the property for a period before committing to a purchase.
In an RTO agreement, the buyer pays the seller a one-time upfront fee, known as an option fee, option consideration, or option money. The fee is the factor that gives the buyer the option to purchase the property in the future. Option fees usually range between 1% – 5% of the property purchase price.
In some cases, a percentage of the rent may be put towards the purchase price of the property. It is important to ask this question prior to signing the agreement. Additionally, with some rent-to-own contracts, the potential buyer may be responsible for maintenance and repairs.
Rent-to-Own Comparison
Remember the days of Blockbuster or movie rental stores? Wow, I miss those. Anyway, rent-to-own agreements are kind of like move rental stores. Here’s how:
- You go to Blockbuster to rent a movie. The movie represents a property in this scenario.
- You liked the movie so much that you kept it past the agreed upon duration, resulting in you paying a late fee. The late fee would represent the RTO option fee.
- You continued to watch the movie and didn’t want to return it. Blockbuster may offer you the option to purchase so that you own the movie. You agree. This would be like the final transaction in an RTO agreement.
The only difference is that in an RTO agreement, the option fee and option to purchase are typically discussed upfront prior to rental lease beginning.
Benefits of Rent-to-Own Agreements
RTOs are a great option to build up a person’s income, credit score, and down payment before committing to a mortgage. Additionally, you get to fully experience the property before purchasing. During the rental period you may discover significant maintenance costs, renovations, upkeep items, etc. that could deter you from purchasing.
When is Rent-to-Own a Viable Option?
When interest rates are high, rental leases aren’t affected by interest rate fluctuations and payments remain consistent. During the rental period, the potential buyer can budget accordingly and continue saving for a down payment and mortgage.
Conclusion
Rent-to-own agreements aren’t for everyone, but they are a great option for individuals looking to purchase a property in the future. An RTO agreement would help secure a property, which would be a great thing when the market is hot, and properties are selling above asking.
If you have any questions about RTO agreements, contact me today!
