While the potential of success for a rent to own agreement is high, buyers and sellers need to have a clear understanding of the RTO process in order to take advantage of the benefits and avoid unfavorable outcomes.
A rent to own agreement typically has more flexibility than traditional contracts and can customize terms to meet specific needs, but basically the seller agrees to allow the buyer to move in immediately, but delaying the sale’s closing while the buyer corrects credit or other issues that have disqualified them for a conventional loan.
They agree on a fixed purchase price and the buyer provides a down or ‘option’ payment, similar to a traditional but extended earnest money deposit, as it shows ‘good faith’ they truly intend to purchase. Also like an earnest deposit, the funds will apply to the down payment or to lower the purchase price.
However the flip side is that to compensate the seller for waiting two or three years to close and for being willing to work with a buyer traditional lenders deem too risky, the deposit is non-refundable if the buyer chooses later not to purchase the home.
Agreements may differ, but usually a rent to own homes sale helps the seller lock in a motivated buyer in a difficult marketplace, and can lock in a slightly higher than market purchase price in exchange for a delayed sale to a buyer with some credit issues to resolve.
The buyer benefits because for slightly more than a typical rental’s first, last and damage deposit, (although this is not how your deposit is applied), a buyer can begin to establish a purchasing history and possibly build equity while sorting their credit challenges.