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Rent to Own a Home: Is It for You?

The Pros of Rent to Own Houses

You found the perfect house and you're ready to commit to the neighborhood. But if you don’t have good credit or enough money for a down payment, you could find yourself out of luck – unless you sign a rent-to-own deal with the seller.

In a rent-to-own or lease option deal, the tenant pays for the privilege of having the first chance to buy the home from the seller at the end of the lease, which usually lasts three years. The tenant and the owner agree on a purchase price at the beginning of the lease and the tenant pays the owner an option fee of 1 to 5 percent of the purchase price. The seller credits the tenant with the fee against the price of the home when they finalize the sale at closing.

Sellers – or landlords – increase their pool of eligible buyers by including those who may not qualify for a loan right now but will in the future. Plus, the seller earns market rent – plus a little extra (called the rent premium) – during the course of the lease. Sellers also don't have to pay a real estate agent fee, saving thousands of dollars. They also eliminate the hassles of endless showings.

Tenants benefit because they get extra time to increase their savings and improve credit scores. Sellers help tenants save by crediting both the option fee and the rent premium at closing. Plus, they get upside protection – a terrific benefit if prices increase significantly over the course of the lease term – and they don't have to move twice.

While somewhat unorthodox, renting to own offers the right parties significant advantages. Speak with a attorney to decide if renting to own a home is right for you.

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