If you want to buy a home in Albuquerque, one of the options you might come across is rent-to-own. It may sound like a great deal at first, but as with anything, there are pros and cons. The real question boils down to if it’s the best way for you to go in order to own a home.
Here are some important things you should know before you get into a rent-to-own agreement.
While rent-to-own properties can be appealing, there are also risks involved.
This type of agreement basically tells you that you’re going to rent a house for a certain amount of time until you gain ownership. The time you rent can range from a couple of months to a few years, depending on your contract.
A company or an individual can be the owner of a property.
A predetermined amount of each rent payment is retained by the seller. That money will go toward the equity at the time of sale.
A lease-purchase agreement and a lease-option agreement are both categorized as rent-to-own agreements. When you follow the lease option agreement, you can opt to buy the home after the time you agree upon. On the other hand, with a lease-purchase agreement, you have a legal obligation to buy the house.
While every process might have its own unique elements, some of the things to anticipate in a rent-to-own transaction include:
- An agreement will first specify a purchase price, which may be based on the current value of the home, or perhaps on the estimated future value. Perhaps a buyer and seller agree to a price during negotiations, while the purchase price is decided when a lease expires.
- Your monthly rent payment then becomes a part of your contract. Since a portion is being set aside toward your future purchase, the rent payment will likely be more than comparable rent prices in the neighborhood.
- The seller can require you to cover the entire cost of maintenance, so when you enter into one of these agreements, it’s important to understand exactly what you’re agreeing to.
- The seller usually collects a one-time fee that isn't refundable, and some sellers will apply it to the equity balance. The fee is usually calculated based on a percentage of the sales price of the house.
- Your contract will dictate a specific lease term.
- At the end of your lease term, if you intend to purchase a house, you’ll have to obtain financing. So there will be a closing date.
The Pros of Rent-to-Own
For buyers, the upsides of rent-to-own agreements include:
- By progressively accumulating your down payment, you’re avoiding having to come up with a large sum upfront.
- There will be no competition from other buyers when you are ready to buy.
- It is not necessary to qualify for a mortgage right away, so you can build your credit score over a period of time.
The Cons of Rent-to-Own
Rent-to-own deals might sound great, but there are a lot of downsides to them.
- Because you are being forced to set aside a down payment, you will pay more rent than you would for a comparable home. On the other hand, you could rent a home at a lower price and then put a portion of your own income into a savings account.
- If your deal doesn’t work out, you still have to pay the option money, which is not refundable.
- There is a good chance that you will be forced to pay all the maintenance and repairs on a home that you do not yet own.
- You might end up with a purchase price in your agreement that is much too high if the home’s value goes down.
- A foreclosure is one example of situations beyond your control that could cause you to lose your equity in the home.
It is important to weigh the pros and cons of your personal financial situation and determine what is best for you.
The traditional route rather than rent-to-own can be more advantageous as a home buyer in Albuquerque, especially if you have good credit.