What is Rent to Own
In hard times of economy, most of the banks don’t lend money easily which shatters the buyers’ dream of owning a house. It’s a worse case for the first time buyers especially for someone with poor credit, low income or savings to reach the down payment level. There comes into rescue the concept of Rent-To-Own concept popularly referred as RTO or rental purchase which in simple words is a system of deferred ownership. This concept is a transaction which is legally documented to rent out tangible property like house, furniture, electronics and home appliances for a monthly rental payment and a front up fees, also involving an agreement to buy such property during the agreed lease period which may usually range between one to three years.
Rent- To –Own transactions though include the option for the renter to purchase the property, does not put any legal obligation on the same, since the person can terminate the agreement at any point of the time by returning the property. However in such case the initial down payment made by him is not refunded back and the lessor or the owner of the property can restructure the contract with another lessee. In many cases, a portion of the monthly rent is counted towards buying the house and the renter has an option to pay off the remaining rental balance at any point and take over the permanent ownership of the property.
With such transactions being common in the context of consumer goods, RTO transactions also describe specialized agreement in real estate. Agreement plays a major role in these transactions and hence the sellers and the buyers must clearly decide and agree on the terms, sale price and the monthly rentals of the property to be sold. Though the amounts are negotiable before signing the agreement, it is subject to strict adherence once agreed, inspite of rise and falls in the current market rates. Rent- To –Own transactions could be a very valuable option for a buyer who cannot afford for bank loans due to poor credit and for the seller who wants to sell his house at a better price or just own the house with regular rental incomes. But mutual risks and disadvantages are always there to surround any business contract.
Let’s understand the benefits and the possible risks associated with RTO transactions for a buyer.
- The buyer can take time in accumulating his money to own the house.
- In cases of poor houses the buyer has the option to withdraw from the agreement and look for a better house, though he has to forego the amount paid as down payment.
- If the seller’s original mortgage on the house is failed to pay, the buyer might have to forcefully leave the house.
- The upfront fee is generally 2-5 % of the selling price of the house which itself is a big chunk of money, which might be difficult for the buyer to pool.
- And finally even at the end of the rental period the buyer might still be in a position of not buying the house due to financial constraints.
Now let’s also look at the other side of it ie the benefits and risk for the seller.
- The seller has an option to fix a higher price for the house during downside trend, at the beginning of the agreement only.
- Where the buyer backs out of the contract, the seller is still not at loss by gaining the complete upfront fees and rent premiums. But for sellers who are very vigorous to sell off the house, it is a square one position again.
- He might lose any potential buyer who comes for a better price than he has already agreed upon with the existing renter.
- If the rentals from the buyer are not prompt, the same affects the mortgage payment to be made by the seller, wherein such seller completely depends on the monthly rent for mortgage payment.