Rent-to-Own Traps: When Lease Payments Don’t Count Toward Ownership
Welcome to the world of rent-to-own housing, where the dream of owning a home can quickly turn into a nightmare. These agreements, which involve renting a property with an option to buy, can seem like a great solution for those who cannot afford a traditional mortgage. However, as with any contract, there are potential pitfalls that tenants need to be aware of. In particular, one major issue with rent-to-own contracts is when lease payments do not count towards ownership. Let’s dive into this rent-to-own trap and learn how to avoid it.
The Basics of Rent-to-Own Housing
First, let’s define what rent-to-own housing is. This arrangement involves a tenant paying rent on a property with the option to buy that property at a predetermined price at the end of the lease. This type of agreement typically lasts between one to three years.
The attraction to rent-to-own housing is that it provides individuals with poor credit or not enough savings for a down payment, the opportunity to purchase a home. It also allows tenants to “try before they buy,” giving them the chance to live in the property and decide if it’s the right fit for them before committing to a purchase. Additionally, rent-to-own contracts can help tenants lock in a purchase price, protecting them from any potential increases in property values.
When Lease Payments Don’t Count Toward Ownership
So why would someone enter into a rent-to-own contract if their lease payments don’t go towards ownership? The main reason is that rent-to-own contracts typically include a rent premium, which is an extra amount added to the monthly rent payment that goes towards the purchase price. This rent premium is usually around 20% above the market rent for a similar property. At the end of the lease, the tenant can use this rent premium as a down payment towards the purchase of the property.
The Problem with Rent Premiums
While this may seem like a great solution, there are two major issues with rent premiums: they are non-refundable and non-credited. This means that if the tenant decides not to purchase the property or fails to qualify for a mortgage, they do not get their rent premium back. Additionally, if the tenant decides to walk away from the contract, they are not entitled to a credit for the premium payments they have made, meaning their lease payments do not count towards ownership.
The Risk of Changing Market Conditions
Another factor to consider is the risk of changing market conditions. The agreed-upon purchase price may no longer be a good deal, or the property may have decreased in value by the end of the lease. In this case, the tenant may not want to purchase the property, but they will have already paid a rent premium, which cannot be refunded.
How to Avoid this Rent-to-Own Trap
So, how can you avoid the trap of lease payments not counting towards ownership in a rent-to-own contract? The key is to thoroughly read and understand the terms of the agreement before signing. Here are a few tips to keep in mind:
Get Everything in Writing
Make sure all the terms and conditions are clearly stated in the contract, including when and how you can exercise your option to purchase, the purchase price, and any rent premiums. This will help prevent any surprises or misunderstandings later on.
Have an Independent Appraisal
Before entering into a rent-to-own contract, have the property independently appraised to ensure that the purchase price is fair. This will also give you a good idea of how the market may change during your lease term.
Review the Contract Thoroughly
Make sure to thoroughly review the contract and understand all the terms. If you are unsure about anything, seek the assistance of a lawyer or a real estate professional. They can help you identify any potential red flags and explain the details of the contract.
Conclusion
Rent-to-own housing can provide a great opportunity for those looking to become homeowners, but it’s essential to fully understand the terms of the agreement before signing. In particular, be aware of any rent premiums and ensure that your lease payments go towards ownership. With proper due diligence and understanding of the contract, you can avoid the trap of lease payments not counting towards ownership and make a successful transition to homeownership.
