When young tenants Mark and Sylvia decided to move from the tenant life to home ownership, they had a pretty good idea that their previous credit indiscretions would make it difficult to qualify for a mortgage.
After discussing their plight with a mortgage lender, they were disappointed to learn that it could take more than a year to pay off their loans enough to qualify for a loan. Discouraged by the prospect of postponing their purchase, the couple looked for alternative ways to buy their first home. At the suggestion of a relative, they decided to explore what is commonly referred to as "rent-to-own".
While the term is most often associated with renting and then buying personal property such as TVs, furniture, appliances, the term can also be applied to buying real estate. In real estate jargon, the term hire purchase is synonymous with the terms "leasing option" and "leasing purchase". A leasing option is a normal rental contract with an option to purchase at the end of the term. A lease purchase is essentially a sale, with the conclusion being postponed until the end of the lease. In either case, buyers typically put a serious cash or lease deposit to ensure their performance.
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Let's say Mark and Sylvia found a home that suits their needs and are offered a 1-year lease for $ 800 per month. You are aware that the owner is asking for a serious cash or option deposit of $ 2,400. In this case, the owner allows Mark & Sylvia to pay the deposit in monthly increments of 200 USD. The additional $ 200 per month, or $ 2,400 over the course of a year, will be used for down payment and closing costs when the sale is completed. A major downside to the arrangement is that if the option is not exercised and the sale is not completed, the landlord / owner will withhold the $ 2,400 security deposit.
The only way for Mark and Sylvia to know whether it is advisable for them to enter into such an arrangement is to be absolutely certain that they can get a mortgage in time to complete the transaction as agreed. It would be foolish for them or anyone else to move forward with an option without first having a viable plan. This is where the expertise of a knowledgeable mortgage lender and broker can be extremely helpful.
Another critical part of a hire purchase is the contract itself. Can the owner kick you out and keep your security deposit if the rent is paid a few days late in the eleventh month? It happens all the time. The best protection against legal issues and misunderstandings down the line is to have an ironclad understanding before signing any paperwork. Purchase and rental contracts are legal and binding documents, the terms of which should be fully understood by both parties before signing on the dashed line.
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Hire purchase concepts are generally sensible and can be a win-win situation for both buyers and sellers. The option gives buyers time to clean up their credit, put money aside for a down payment, and make arrangements to get a mortgage. Buyers can also benefit if the value of the property increases over the term of the lease. Sellers benefit from a steady stream of income throughout the option period, a tenant to look after the property, and a qualified buyer at the end of the rental period. Your local broker or mortgage specialist can provide more information.
I'll see you close.
Gary Sandler is a full-time real estate agent and President of Gary Sandler Inc., Realtors in Las Cruces. He is happy to answer questions and can be reached at 575-642-2292 or gary@garysandler.com.
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source https://seapointrealtors.com/2021/07/25/rent-to-own-can-benefit-both-buyers-and-sellers/
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