Rent-to-own homes: What to know when selling a house

We answer the question: "What is rent-to-own?"

You haven't been able to sell your home after moving to a new community, so you are considering renting your existing house to a young couple who can't yet afford to buy it.

You may have questions—and even concerns—about entering into a rent-to-own agreement. Here are some rent-to-own pros and cons to consider before making your next move.

What is rent to own?

A typical rent-to-own scenario involves a home owner renting his or her house to a prospective buyer for one to three years, after which time part of the rent may be credited toward the down payment or closing costs. Rent-to-own homes are sometimes called lease-to-own or lease purchase, but are not the same as a lease option. The difference is important:

• In a rent-to-buy, a lease-to-own, or a lease purchase situation, a seller and buyer enter into a purchase contract with an extended closing date.
• In a lease option, the renter may have first right of refusal to buy the home once the lease is up, but is not under a contractual obligation to do so.

Why choose a rent-to-own option?

If you are a seller, you may enter into a rent-to-own home agreement because you want to sell but are having difficulty finding a buyer.

This option makes a home listed for sale available to new groups of potential buyers: buyers who may not have enough saved to make a down payment, buyers with poor credit histories, or buyers who want to live in a specific neighborhood or school district, but can't yet afford a mortgage in the area. In cases where buyers really want a house, rent to own may be a desired option. Entering into an agreement gives them time to build up savings, bring down debt, reverse a poor credit rating or gain access to schools and parks for their children while they work toward their goal.

Rent-to-own considerations for the seller

Sellers need to determine an asking price for the home, and they often benefit from a real estate lawyer's help in drafting and negotiating the contract. Like any other real estate transaction, the price is negotiable; however, once the agreement is signed, the price is locked in for the term of the contract, even if comparable home prices increase or decrease.

If you enter into a rent-to-own agreement when selling a house, benefits may include:

• Renting to a more responsible tenant. People who plan to buy the home may take better care of it than a renter who does not intend to buy a house.
• Having rent cover a portion of or your entire monthly mortgage may ease financial burdens.
• The possibility of earning a nonrefundable deposit (this may or may not be negotiated in the contract).

Also, you'll want to check with your insurance company. Some companies will not insure a home that is not owner-occupied. If so, you may need to obtain a policy just for the dwelling itself, and your tenants would need their own renters policy to cover liability risks and their contents.

Tips for rent-to-own home agreements

Once you have decided that a rent-to-own option is right for you, and you have hired a lawyer, you'll need to address several issues in the agreement. A rent-to-own agreement should include:

• Agreement length
• Cost of rent
• Clear responsibilities for property taxes, insurance, homeowner fees, utilities, maintenance and repairs during the lease period

Entering into a rent-to-own home agreement may be more complicated than buying a house outright, but if you are a seller, rent-to-own agreements may give you one less thing to worry about while you settle into your new home.

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Sources

1. Campbell, Joey. "How Does Rent-to-Own Work When Buying a House?"Home Guides. N.p., n.d. Web. 14 Sept. 2015. http://homeguides.sfgate.com/rent-to-own-work-buying-house-8466.html.
2. Kane, Colleen. "Rent to Own Homes: An Option to Consider?" CNBC. N.p., 22 Jan. 2013. Web. 14 Sept. 2015. http://www.cnbc.com/id/100391884.
3. Lerner, Michele. "Rent-to-Own Agreements Can Benefit Buyers and Sellers-realtor.com." Real Estate News and Advice Realtor.com. N.p., 06 Jan. 2014. Web. 14 Sept. 2015. http://www.realtor.com/advice/rent/rent-to-own-agreement-can-benefit-buyer-and-seller/.
4. Siddons, Sarah, and Chris Opfer. "How Rent-to-own Homes Work. "HowStuffWorks. N.p., n.d. Web. 14 Sept. 2015. http://home.howstuffworks.com/real-estate/buying-home/rent-to-own-homes.htm.