These days getting approved for a home loan of any type is very difficult. The banks, reacting to the economic crisis are heavily regulated. The required credit score, to qualify for a home loan and higher than ever down payments are keeping many potential homeowners literally out in the cold. The problem is a serious one for many families. In addition to not being able to get a loan now, with the economy improving, housing values will rise, adding many thousands to the final price of the house and depriving them of collecting the appreciation.
Instead of buying outright many people are choosing to enter into rent to own homes agreements with home sellers. These agreements are generally outlined in rent to own contracts. A rent to own contract is actually two contracts. The first contract is the rental agreement between the landlord and tenant. This contract includes the monthly rent amount and the day it is due along with any information about late charges or maintenance required. It also includes the life span of the lease and this is usually the time needed for the buyer to obtain a loan or otherwise come up with the purchase price. These agreements last for usually three years maximum but the date is as flexible as the two parties agree on. While it is rare some owners will even agree to rent to own for the entire amount.
Rent To Own Contract
The second contract is the lease purchase agreement. This document is much more important than the first document. While much of the same information is included, such as the monthly payment amount, end of the lease period, and late payment agreements it also contains much more. This is a situation in which both the buyer and seller need protection. The lease purchase agreement should have all of each party’s rights outlined clearly. The following is a short list of issues that should be addressed in a lease purchase agreement.
- Total purchase prices of the house
- Amount of money due each month that is applied to the above price
- Due dates of all payments, including the final due date of the total
- Maintenance and remodeling issues
- Default/breach consequences for both the buyer and seller
If you have a lease rental period that is three years or longer you should understand that there are a great many things that can happen in that time. The values of homes could increase substantially and the home owner may decide that they do not want to wait. In a situation like this, if not protected by the lease purchase agreement, the buyer could lose all of their investment. The same applies to the buyer who finds a home that they like better, for a better price, and elects to opt out. The entire period that the seller has held the home off the market in expectation of this purchase is lost.
Provisions Of A Rent To Own Contract
Another potential problem area is remodeling and maintenance. The lease purchase agreement should describe who is responsible for maintenance. This is sometimes a large problem. In most tenant agreements the property owner is responsible for maintenance. Because this is a situation in which each month the renter is increasing his interest in the property it can be confusing if the details are not outlined in full. This is also the case with remodeling. While most property owners will not have a problem with this, thinking that if the work is done and the family defaults, they will benefit from the appreciation from the remodeling. Depending on the amount of work to be done remodeling can increase the value of the house tens of thousands of dollars.
Another issue that can be resolved in a lease purchase contract is the addition of equipment. Alternative energy sources all require the installation of special equipment. Solar cells, wind generators, things like this are examples. Much of this equipment is very expensive. If either the buyer or the seller chooses to opt out of the contract, or they do so by mutual agreement, who keeps this equipment? Removing it can decrease the value of the property and letting it stay will cheat the buyer out of their investment. It will not be too many years before alternative energy on homes is more common than not and this will become a major issue in most real estate transactions.
In rent to own homes, a contract can be nearly anything that the parties want it to be. It can include any type of conditions that are not forbidden by law and should be designed to protect the buyer and seller equally. The best way to assure that it is done with all parties in mind is to either have a licensed real estate attorney prepare it for you or have one review it completely before you sign it.