Rent-To-Own Homes

"Lease to own homes"

Rent-To-Own Homes Overview

Introduction:

"Rent-to-own homes (RTO)" are also known as "lease-to-own homes (LTO)" or "lease purchase homes" and are used interchangeably. This web page will explain the rent-to-own process and why it's fast becoming a major force in the residential real estate industry.

Rent-to-own homes is not a brand new concept. However, it is a concept whose time has come and is rapidly growing in popularity. The reason for this growth in rent-to-own homes activity is largely due to the current economic conditions in America. Virtually all Americans have been affected by the current economy, whether it's by the stock market declines, job layoffs, foreclosures, bankruptcies or what have you -- many people have felt the impact and have been forced to conserve and change their lifestyles. Many have lost their homes or are on the verge of losing them because they cannot afford their monthly payments anymore (particularly if they hold adjustable rate or sub-prime mortgages). And, many people have seen their credit scores badly damaged.

The emergence of rent-to-own homes:

There are a number of young companies that have designed their business models to assist people who retain the American Dream of home ownership, but cannot now qualify for home loans due to damaged credit or because they just cannot afford a big down payment anymore.

In the past, a lease purchase was typically executed on an individual basis by a landlord with a handshake agreement and really wasn't a formalized process. But today, there are companies that are completely dedicated to the rent-to-own homes industry. They have professionalized the business. They help people who can't qualify for loans to find homes, get them moved in, help them repair their credit and get back on the road to home ownership.

These new lease or rent-to-own homes companies don't scrutinize credit scores like lenders. Instead, they are primarily concerned about whether or not a prospective tenant can afford monthly lease payments. Importantly, they also provide credit counseling and assistance to help tenants improve their credit scores during the term of their lease, so that when the lease expires, they will be able to qualify for a mortgage to purchase the home they have been leasing.

Another great benefit of a rent to own contract is NO CLOSING COSTS to move in!

"The Congressional House and Senate Budget Committees have looked favorably towards a Rent-to-Own solution. It requires no legislation and can be highly targeted and quickly implemented."
- Dean Baker, Co-director of the U.S. Center for Economic and Policy Research

"Economist Dean Baker's suggestion [Rent-to-Own] for how to deal with the rise in foreclosures is among the best policy interventions I have heard floated in the current environment. This is one of the better ones."
- Dr. N. Gregory Mankiw, The President's Chairman of the Council of Economic Advisers & Harvard Professor of Economics

Rent-To-Own Homes Contract Details

The rent-to-own contract is essentially a residential lease agreement combined with an option to purchase clause where the lessee (tenant) agrees to buy the home within a contracted period of time (commonly 1-3 years) at a contracted selling price.

The lessee will pay an "Option Fee" (usually several thousand dollars) to participate in a rent-to-own homes program. Some companies will apply some or all of this fee towards the down payment to purchase the home at the end of the lease. This fee is typically forfeited if the lessee decides they do not want to purchase the home or cannot qualify for a home loan.

The lessee's monthly payment will usually be higher in a rent-to-own homes program than it would be if they were to simply rent the house with no option to purchase clause. That is because the payments include a "Lease Premium". This premium amount will accumulate over the term of the lease and be applied towards the down payment to purchase the home at the end of the lease. These accumulated monies are typically forfeited if the lessee decides they do not want to purchase the home or cannot qualify for a home loan.

Home Sale Price:

When the rent to own contract is finalized, it will include an agreed to sale price for the home. This price is locked in. Whether the real estate market goes up or down during the term of the lease, when the lease expires that's the selling price.

This is great for the buyer if the real estate market goes up. This means that the house will be worth more that the contracted selling price -- so the buyer has already built equity in the home before they buy it!

On the flip-side, if the real estate market goes down, the house will be worth less than the selling price. So, it's a bit of a gamble for both the buyer and the seller. Some lease to own homes companies might negotiate the selling price in this situation.

Assignment Clauses:

Assignment is where the original lessee chooses to assign their lease (also known as a "sublease") or their option to purchase the home to another party and usually for a fee. The particulars pertaining to assignment are typically written into the rent to own contract. In most cases, the lease-to-own homes company (lessor) will state that all assignments must be approved in writing by them. And, the original lessee will typically be held responsible for the performance of the contract. Meaning: If the party that the lease was assigned to does not make their payments, the original lessee will be responsible for the debt.

Lease Term:

Typically, lease periods or "terms" are for 1-3 years. If the lessee's credit needs repair or if the real estate market is soft, it benefits the lessee to opt for a longer lease term. This gives them more time to work on their credit score so they can qualify to purchase the home at the end of the lease. It also gives the real estate market more time to turn around. But, if the lessee's credit is good and the real estate market is hot, they would benefit more from a shorter lease term to take advantage of appreciation and growing equity in the home.

Rent-To-Own Homes Future

This is a concept that is thriving in this recession and will continue to thrive regardless of the economic conditions because it just make too much sense!

We are already seeing the rent-to-own homes concept becoming a force in the residential real estate industry. In the future, you can fully expect that rent-to-own will become a great option for virtually anyone buying a home regardless of their financial circumstances. This is because it provides an opportunity for aspiring homeowners to literally "test drive" a home and a neighborhood before making the final decision to buy.

Lease to own homes

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Rent-To-Own Homes