No Standard Rent to Own Deal
Unlike standard home purchase with traditional mortgage, there is no such thing as a "standard" rent to own deal. Each rent to own might be a bit different from each other, and how your rent to own deal is structured depends on the the particulars of the deal. Having said that, these are the typical steps you would take a consummate a rent to own deal:
Make sure it is the right home for you
Rent to own is a serious commitment, and you want to approach it as such. You want to make sure it is in good condition, in a neighborhood you want, and has the right size, layout and amenities you want in the long term. There is one more thing you want to consider. Namely, is this home likely to appreciate in value? Obviously, there is no way to know that in advance, so the best you can do is to make sure you give yourself a best change to select a home that will do as well or better than the market. Here are a few things to help determine that:
- Is the home in a desirable school district? Homes in good public school district typically hold their value better and appreciate faster than homes in not so great school zone. Greatshool.org and other similar sites will provide you with school rating info that can be helpful.
- Avoid homes with too much personality The lot is over a few acres; the house is located in unincorporated area; or it is built in a non-traditional, extremely unique way. Avoid homes that have too much personality, because they are difficult to assess true value. This means very high risk when it comes time to mortgage-finance once your credit is built up
- Home condition matters more Make sure the foundation, roof and other big-ticket items are in good condition. There is a risk that you might have to pay for the repair or pay a break-up fee if you discover a major issue even during your rental period. Even though you are starting out renting, make sure you do the inspection as you would in a purchase.
Who Is Financing Your Rent to Own?
As mentioned earlier, you should think of Rent to Own as a alternative financing option to the traditional mortgage. How the deal is structured depends on who is financing the deal. Here are some examples:
In this case, the seller, or the current owner is financing the deal. They are letting you "lock in" your purchase price while renting the property for a set period of time. These homes are typically listed as "owner financing" in the listing. You will deal directly with the home seller or their real estate agent. There are no standard rent to own agreement format, so you'd be best served to have a real estate attorney review the rent to own agreement.
These may be financial institutes (including some hedge funds) that have purchased homes in large numbers, performed moderate improvements and are selling them with their own rent to own financing. Most of these deals have standard process and structures that are standardized. While more structured than individual seller deals, you still need to review the terms very closely (attorney review is a good idea here, too) before signing the dotted lines.
Rent to Own Financing Companies
There are a small number of companies that are buying properties that you choose and finance it as rent to own. You go through their application process to be "pre-approved" and they give you a price range of the home they'll finance. You'd typically work with a real estate agent to find such home. These are becoming increasingly viable option, and there are smaller number of gotchas. Again, you still need to review everything very closely and understand every detail of the deal terms before you sign the papers. Hiring a real estate attorney for review is always a good idea.
In summary, proceed with caution with any other home purchase option. But at the end, if you find the home you want, and a deal that is reasonable, then you can move into your long-term, stable home sooner than through a traditional method.
Next, take a look at a sample rent to own agreement to get yourself familiar with different terms therein.