When Rent-to-Own Homes Are a Good Idea

NEW YORK (MainStreet) – Rent-to-own deals have an unseemly image, conjuring up thoughts of overpriced TVs and living room sets. But they can actually prove useful in today’s troubled housing market, allowing buyers and sellers to lock in deals until conditions improve.

Consider, for example, a buyer who has to move for a new job but can’t buy a new home until the old one sells, or the buyer who needs a little time to repair his credit or wait for his spouse to land a job. With a lease-to-own deal, also called a lease-purchase agreement, any of these buyers could nail down a dream home that’s available today, perhaps at a better price than in a year or two. That can take the sting out of renting.

Sellers can benefit as well. Instead of leaving a home empty, the owner can bring in a tenant to cover expenses, something that can be hard to do if a home is up for sale. The owner thus doesn’t have to give in and sell while prices are down and buyers are scarce.

Still, a lease-to-own is not to be taken lightly. Both parties are gambling on future conditions such as home prices and mortgage rates, and their bets could backfire.

While all lease-purchase agreements are negotiable, they tend to follow a basic blueprint: Seller and buyer agree on a sale price for the property, with the buyer given a specific period to exercise the purchase option, typically one to three years.

In exchange, the buyer pays a one-time option fee, typically from 1% to 5% of the sales price. The buyer pays rent plus a rent premium that, like the option fee, compensates the seller for keeping the home available.

If the buyer exercises the purchase option, the option fee and rent premium will typically be applied against the sale price. If the option is not exercised before the deadline, the seller keeps the fees and can find another buyer.