Rent to Own: Tips for Dealing with Your Lender
Rent-to-own homes, also known as lease-purchase homes, come with unique problems. Often the "lender" is the person who owns the home. This type of arrangement is called a contract-for-deed agreement, and it is important to make sure that all of the potential problems that could arise are covered in the agreement before any paperwork is signed.
Types of Rent-to-Own Agreements
There are two types of rent-to-own agreements. A buyer must be aware of which one he is agreeing to before any agreement is written.
In one situation, the buyer pays the owner/lender a monthly rent payment. This payment goes toward buying the home, and the agreement can be nullified if certain conditions are not met or if the buyer changes his mind. Often the home will revert back to the owner/lender, and the buyer can move out as if the home were simply a rental. However, this isn't the most common type of a rent-to-own agreement.
Under another type of agreement, the buyer and owner/lender agree that the buyer will pay an extra amount on top of the rent payment. This extra amount goes toward building equity. In this situation, the buyer isn't obligated to purchase the home, but will have the equity built up to purchase the property later if he chooses to do so.
Rent-to-Own Maintenance Terms
In both of these types of agreements, the person buying the home isn't considered the owner as with a traditional mortgage loan with a bank or other financial institution. The owner of the property is the lender, which can cause problems if the agreement has unreasonable or unclear terms.
For example, the owner/lender may require that the buyer maintain the property. If the buyer does not maintain the property to the owner/lender's expectations, the owner/lender may orderwork to be done on the home. In this situation, the buyer is held responsible for the maintenance bill even though he didn't order the work. Because of this potential financial risk, it is important that the agreement sets forth clear guidelines for proper maintenance.
- Are major repairs considered maintenance? Will the owner/lender pay for repairs of larger items, such as roof repairs and electrical problems?
- Will the owner/lender conduct inspections of the house to ensure that the house is maintained? When and how often?
- What happens when the owner/lender and the buyer don't agree on whether a certain repair should be made?
Insuring a Rent-to-Own Home
Who will insure the property during the rent-to-own agreement is another important factor to consider. If the insurance is bundled with the monthly mortgage payment, be aware that the owner/lender chooses the insurer. This may mean that the buyer will pay a higher rate than if he paid the insurance separately. In many cases, the owner/lender will bundle the insurance as part of the mortgage payment to ensure that the buyer is paying insurance premiums.
Though the cost of a home may be one of the first things that a buyer and seller talk about in a real-estate transaction, several factors should be examined to determine the long-term overall price in a rent-own-home arrangement.
First, someone buying a rent-to-own home should make sure that the contract includes a fixed rate in order to avoid rising mortgage rates. If a fixed rate can't be agreed upon, then the agreement should state that the rate can only rise in accordance with the national average. This will keep the owner/lender from overcharging the buyer.
Second, the buyer should research the value of the home, which can be done by visiting the local property tax department. The proper value of the home should be reflected in the payment agreement.
Third, the buyer should ensure that the interest rate offered by the owner/lender isn't predatory, meaning that the interest rate offered should be similar to the national average.
It is always a good idea to have a lawyer look over any contract before signing. This ensures that the terms are agreeable for both parties and that the owner/lender does not take advantage of the buyer.