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How 'Rent to Own' Actually Works

Sep 12, 2008
The real estate market in the current economy is going through a heavy selling phase. Many properties that are currently listed have been for sale for some time, which results in frustration for sellers who wish to get rid of their home as soon as possible. One result of this situation is that more sellers are offering a rent to own option as a way to attract buyers.

Rent to own need not be a last resort to attract buyers. It can be a great way to sell your house, whilst also having many benefits for potential buyers. Sellers are able to earn money in the form of monthly rent from the tenants, whilst also knowing that the tenants are bound to a contract that can last for up to three years. During this time the tenant must pay the agreed rent value, with half of this money going straight to the home owner and the other half being put into a fund. This fund money is put towards the purchase of the house if the buyer decides to proceed with buying it, otherwise it is returned to the seller.

Many tenants in a rent to buy situation do not have a clear credit history and as such had difficult obtaining a home loan. Whilst this is unfortunate, they now have the opportunity of renting to own the property of their choice. They are at an advantage as the seller is unable by law to sell the house to another buyer whilst the rent to own contract is in place.

There are two parts to a rent to own contract. The first is the Standard Rental Agreement which stipulates the rental terms. The second part is the Option to Purchase contract which states that the buyer needs to pay a 2-5% non refundable down payment based on the price of the property. This is like a security deposit for the seller. The contract also grants the tenant an exclusive right to purchase the property where the buyer has a choice whether or not to buy the property after the rental period expires.

Sellers benefit from rent to buy by receiving regular, certain income over a certain period of time. Buyers benefit by knowing that the house they want wont be sold, and they can 'test the waters' for one or more years before deciding whether or not to purchase it.

What happens if the tenants decide not to exercise their option to buy the house? In most cases, when you try to sell your home and it doesn't sell, it's a bad thing. Not with a rent to own deal - simply get new tenants in, get a new option consideration down payment from them, and wait until the end of the lease to see if they exercise their option. Not only do you get a new non-refundable option down payment, you get to keep the original option down payment from your first tenants. Many landlords who use the rent to own strategy hope that their houses never sell!
About the Author
Adem runs the real estate investing site ProfitPiggy.com where you can find detailed examples of the most popular real estate investing methods, real estate investing articles, courses, and more. Visit ProfitPiggy.com now to get started!
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