Rent To Own FAQs
Q: What is a Rent to Own Lease Option?
A: A Rent to Own Lease Option is the lease of a property with the option to purchase it. It is known by many names: a Rent to Own, Rent to Buy or Lease Option. The Transaction is often coupled with a non-refundable Lease Option Deposit which is credited to the purchase Price if the Buyer exercises the option to purchase and is retained by the Seller if not.
Q: How Long is the Option Period? The Option period is up to the parties, one to three years is most common, during which time the Buyer saves up the down payment needed to purchase. The Seller can either provide Seller Financing for the Sale, if willing and able, or the Buyer can obtain a loan.
Q: Why does the Rent to Own work in an unstable real estate market?
A: People are more open to creative sales in an unstable marketplace. They don't want to move on until the market stabilizes, but life goes on and their housing needs change. The lease option allows a seller to get out from under payments while the buyer decides whether to buy the property. The buyer needs new housing too, but is concerned about pricing and loans. With the lease option, the Buyer moves into his new home without yet committing to a purchase but with the absolute right to purchase.
Q: Price is the issue. How is that set?
A: Following the real estate recession of 2008 even this many years later some Sellers struggle to justify selling into a discounted market that undervalues their homes, feeling that a few more years may bring a higher price. And some buyers defer their dream of home ownership having lost so much of their nest egg in the recession. Marilyn has created the Market Modulated Lease Option to meet these challenges. This new lease option arrangement allows the property's price to be set later, not now, and gives the Buyer enough time to replenish the down payment funds.
Q: Does price have to be set by the market later? What if we want to set it now?
A: It can be set now, if that's what the parties want. We just give you the opportunity to let the market modulate it later. Our format includes both options.
Q: If we go with a market modulated price, how is it determined?
A: By appraisal just prior to the time the option must be exercised.
Q: If we want to agree to price now, can we get an appraisal now?
A: Yes, an appraisal is the only way to get an accurate value for a property.
Q: When do the parties sign the Rent to Own Agreement?
A: When they decide to go ahead, they sign the Rent to Own Lease Option Agreement which consists of an Option agreement, a Lease and a Purchase Agreement. The terms of the Purchase Agreement are put on hold until the option is exercised, if it is.
Q: Shouldn't the Buyer conduct due diligence?
A: Yes. When the Option Agreement is signed, Seller has 10 days to provide buyer with a Natural Hazard Disclosure Report, Seller disclosures, and a Preliminary Title Report. When Buyer exercises the Purchase option, if s/he does, Buyer investigates the purchase contingencies such as inspection of the property.
Q: When is the Option Deposit paid?
A: An initial refundable or non-refundable deposit is made when the Option Agreement is signed.
Q: Why is it important to have an Option Deposit?
A: To give the Rent to Own Buyer a financial stake in the property as an incentive for the purchase option to be exercised and to give the seller financial consideration for making the property available for purchase during the option period.
Q: Is the Option Deposit always credited to the purchase price if the option is exercised?
A: Yes.
Q: Can the Option Deposit be paid in full or in part when the rent is paid dring the option period?
A: Yes, often the rent is set higher than market value with the overage amount applied to the Option Deposit.
Q: Does the Seller get to use the Option Deposit?
A: Typically, the option deposit goes directly to the Seller when it becomes non-refundable, but the parties can agree otherwise. Since the rent amount often does not cover the property's expenses, the Seller needs this fund to pay property expenses beyond the monthly rent.
Q: Is interest paid on the Option Deposit?
A: Generally no, but the parties may agree otherwise.
Q: Does the Buyer have the absolute right to purchase the Property?
A: Yes.
Q: Can the Potential Buyer make improvements to the property?
Yes, with the consent of the Seller who wants to make sure the improvement will add to the property's value in case the Buyer does not purchase the property or for appraisal later if the price will be set later.
Q: Is there a loan contingency to the Rent to Buy Lease Option purchase?
A: Yes, but not the in the traditional sense. The buyer does not have to purchase if a loan cannot be obtained, but he will lose his option deposit. The buyer, therefore, wants to make sure he qualifies for the required loan as he nears the purchase date.
Q: What if the value of the property decrease so when the Buyer is to exercise the option to purchase, the price is lower than when the lease began?
A: This is why the parties may want to choose the Market Modulated method of setting the purchase price.
Q: The two most important terms of the Rent to Own Lease Option seem to be when the option can be exercised and when the value will be set. How do we arrive at a decision about these important factors?
A: Through studying the market and the Buyer and Selling each coming to an educated guess as to when the market will bottom. Then, negotiating something between these variables.