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Rent-to-Own Schemes in Real Estate

Rent-to-Own Schemes in Real Estate
Rent-to-Own Schemes in Real Estate

If you haven’t heard of rent-to-own, you may have heard it called a lease-purchase or a lease-option. The gist of rent-to-own is that it’s a lease agreement where the tenant has an option to purchase a property to own it outright after a certain amount of time has passed with renting the same. It is an alternative for people who want to rent and don’t have enough money to pay off a deposit to get a mortgage secured. It’s an option for the less wealthy renters that want to own a home for themselves. On first glance, a rent-to-own will seem to be an excellent alternative for sellers and buyers in a fluctuating market. However, if you look into it, rent-to-own is significantly risky for the two parties.

Security is Lacking

A rent-to-own is as dangerous and risky as a traditional mortgage for the buyer and tenant. But there isn’t a way to recover from it like with a regular mortgage. As an example, If a tenant doesn’t pay their rent on time, then they will have their property taken away like when they lose it the same way as from a foreclosure. But it isn’t precisely like with foreclosure since there are no ways to gain back the investment for the tenant. He doesn’t own the property himself so he can’t sell it. It doesn’t matter if it’s close to or far from the tenant is to the end of the lease’s term. Any spare funds that the tenant has are forfeit to the down payment the tenant will eventually make towards his home.

It Isn’t Guaranteed To Have Financing

If the tenant wants to purchase the property when the lease is already expired, they will need to have financing secured. It isn’t guaranteed to obtain financing at all. The tenant is the one that’s responsible for securing a mortgage. If a mortgage isn’t in reach for the tenant or the tenant’s credit history isn’t sufficient enough to be considered, then the money invested in the property is forfeit. When this happens, the property’s landlord is stuck with it without a buyer to buy the property potentially.

The Sale Agreement Isn’t Binding

It isn’t always beneficial to the property seller to have a rent-to-own agreement. The tenant will usually purchase the option to buy the property at a later date, but that doesn’t make them bound to buy it at any time after the expiration of the lease agreement. The tenant will only have the option to buy it. If a landlord wants their interests protected, they can try to get a lease-purchase arrangement stipulated. It’s an unusual way to have a rent-to-own arrangement that binds the tenant to purchase the property. This method, however, is even riskier for the tenant and landlord since the tenant wouldn’t be able to have financing secured. The lease-option arrangement is another way to have it done that involves both the landlord and the tenant. The arrangement lets the tenant renege without obtaining any penalties. It will also allow the landlord a way to avoid the sale they might get. No matter what, the landlord accepts the risk of losing a significant sale.