This post was originally published on our sister site, MyFirstCondo.com.
Home sales are still below the peak reached before the housing bubble burst in 2008, and many Millennials are still reluctant to buy their first home, choosing instead to rent or live with family and save for the future.
This challenging real estate market has made condos a popular solution for people who are sick of throwing their money away on rent but aren’t yet ready to buy an entire house. Of course, not everyone is able to purchase a condo outright, or even make a down payment, making ‘rent-to-own condos’ or ‘rental-purchase’ agreements an alternative for savvy investors who are tired of wasting money on rent every single month, choosing instead to invest in their future.
Are rent-to-own condos right for you? As with every major financial decision, rent-to-own transactions pose their own risks. Here’s what you need to know about about the rental-purchase agreements to help you make a better, more informed choice.
1. Why People Choose Rent-To-Own Option?
The most common reasons people choose a rent-to-own condo are:
- Less-than-great credit
- Inability to get a mortgage now, but will likely be able to do so in the near future.
One thing to keep in mind with rent-to-own agreements is that, usually, you have to be able to qualify for a traditional mortgage within a couple of years of moving in. If you don’t, you may lose all of the extra money you put into your rental, and all that effort (and money) will have gone for nothing.
2. How Rent-To-Own Condo Arrangements Work
While no two rent-to-own agreements are identical, with each state having its own regulations and requirements, typically a rental-purchase agreement involves the renter/buyer being given an option to purchase the property after a set period of time, on average of 3 to 4 years. This is accomplished with an option payment, which is usually a one-time payment to the seller offering the buyer the option, but not the requirement, to purchase the condo at the end of the prescribed time period. The option price is usually between 2.5% and 7% of the total purchase price, with 3% being the average rate. This is significantly less than the 20% down payment that most mortgages require.
3. How Payment Price Is Calculated
Each rent-to-own contract decides how the purchase price will be calculated. Usually, the buyer and seller agree on a purchase price, with the current market rate or slightly higher being a common agreement. Other times, the buyer and seller agree to settle on a price when the lease expires. Most buyers prefer the former setup, as it locks in a purchase price, rather than depending on the whims of some future market.
4. How Rental Payments Work For Rent-To-Own Condos
During the lease, the buyer agrees to pay the full amount of the rent, of which a percentage will be applied towards the purchase price. This is the rent credit, which is commonly around 25% of the rent. So, if the rent were $2000/mo., $500 would be credited towards the purchase price. This would amount to $18,000, over the span of a common 3-year lease.
5. Maintenance May Be The Buyer’s Duty In Rental-Purchase Agreements
Although each arrangement is different, buyers may be responsible for potential maintenance while renting, as well as homeowners’ association fees, property taxes, or insurance. Since you are technically renting, you also need rental insurance to cover the loss of any personal property. Make sure that any maintenance or repair policies are covered in the rent-to-own agreement.
6. When Are Rent-To-Own Condos A Good Idea?
Rent-to-own condos are often a great choice for people who aren’t yet ready to make the down payment on a mortgage or are recovering from bad credit. It gives potential homeowners a chance to build a credit history and some additional time to save. Rental-Purchase agreements are also a good idea if you’re fairly certain you do want to purchase a condo in your area, and you want to nail down a price.
7. Some Things To Watch Out For With Rent-To-Own Condos
Obviously, there are a lot of good things about rent-to-own condo situations, but it’s not a perfect solution for everyone. First of all, being slightly uncommon, rental-purchase agreements are not as tightly monitored as selling or renting a home, which leads to some uncertainty in the purchase-option of the proceedings. This causes unscrupulous real estate owners to rent properties at a higher rate, with no intention of ever completing the sale, eventually making off with your option deposit.
Are you considering a rent-to-own condo agreement, or are you in one currently? What are some of your thoughts, questions, or concerns? Let us know in the comments!
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