Is Rent-to-Own Home ownership Right for You in 2017?

Is a Rent-To-Own Agreement for You?

 

As mentioned in an article at Nolo.com, author  Anna Arnopolsky explained that “properly-constructed rent-to-own agreement can be an optimal solution for both a landlord and a tenant.” She laid out the Tenant Benefits of Rent-to-Own Agreements in an awesome way.

“A rent-to-own agreement could be a good choice for a tenant who wants to own a house and reap the benefits of home ownership but, due to bad credit or lack of capital (the typical 15-20% down payment required), does not qualify for a mortgage.” This is just the bare scratch of the surface. There is so much more to learn.

This type of arrangement allows a tenant to invest and build equity in a house while leaving open the option of walking away—for example, if the tenant’s financial situation changes for the worse, or the tenant simply no longer wishes to live in or purchase the house. While there may be serious financial consequences (if the tenant paid a hefty option fee or has paid a lot of rent money into an escrow account), the tenant is not legally obligated to purchase the house under rent-to-own agreements. A decision to forfeit the option will not result in foreclosure proceedings and will not impact the tenant’s credit history.

Landlord Pros and Cons of Rent-to-Own Agreements

Landlords may benefit from a rent-to-own arrangement as well. Landlords who want to sell their rental property, but are having difficulty doing so, may find a buyer through a rent-to-own arrangement. During the option period, the landlord enjoys a reliable, long-term tenant, and usually does not have to deal with the expense and cost of maintaining the rental property. Also, if the tenant does not exercise the option, the landlord retains the option fee and the funds set aside in escrow. Finally, landlords may also have various financial incentives for considering a rent-to-own agreement. For example, a landlord with a negative cash flow may find it advantageous to receive a small amount of cash now and regular income (in the form of higher-than-normal monthly rent), and tax advantages of this arrangement, as opposed to a lump sum payment from sale of the property.

 

On the other hand, rent-to-own agreements have some downsides for landlords. Because they are unilateral agreements, the landlord is contractually obligated to sell the house to the tenant, if the option is exercised. The tenant, however, is not contractually obligated to purchase the house. Instead, the tenant may choose whether or not to exercise the option. The landlord is therefore bound by the agreement and may not sell the house to a third party during the option period.

One Comment

Add a Comment