How Tenants Can Find a Good Deal When Buying a Rental Property
February 20, 2019 | By Louis Tully
Are you currently playing the tenant role in your living situation? Wish you could somehow magically switch from being the tenant to someone else’s property to owning your own property? Well, you can!
It’s actually not that uncommon for tenants to flip the switch on their living situation by opting to own the very place they’ve been paying rent for. Of course, buying a rental property isn’t magic, but it will take some doing since rent-to-own scenarios are typically complex in nature. Here’s a look into how it works:
How Rent-to-Own Works
As we said, rent-to-own arrangements can get pretty tricky, and if you're not careful, you could end up falling victim to a very risky financial situation. With that said, starting off can be as simple as signing the lease. But once you've decided you want to buy the place you've been renting, it's important to keep a few things in mind:
- Option-to-buy clauses: These clauses are what outline the terms that apply to purchasing the rental property. These are the terms that kick in once the tenant’s current lease ends.
- Obligation-to-buy agreements: When signing on this agreement, there’s no turning back. Should you agree to buy after the lease is up, you have to stand by this decision no matter what.
- A fluctuating market: Again once you’ve agreed to buy at the owner’s asking price, there’s no going back. Even if the market changes and value goes down, you’re still stuck paying the originally agreed upon price.
Once you've agreed to the terms of the obligation-to-buy agreement, you'll typically have to pay extra each month until your lease expires. This extra money is usually put towards either the down payment or an escrow account. At this point, the arrangement is locked in and you are fully committed to buying the rental property.
Is Rent-to-Own a Good Idea?
If your first attempt at buying a home failed due to not having enough down payment or maybe even not enough credit, then a rent-to-own option might be good for you. Rather than having to wait it out, a rent-to-own arrangement might speed up the home-buying process while giving you a head start on building equity in your future home.
Since you’ve technically been paying down on the home’s mortgage the whole time you were renting, a rent-to-own option isn’t necessarily a bad choice. With that said, you’ll still want to consider the responsibility that comes with taking over ownership of the property.
For starters, you’ll be fully responsible for anything that will eventually break in the house; roof, laundry unit(s), hot water heater, air conditioner, kitchen appliances, etc. the days of relying on the landlord to fix things up will be long gone as soon as the lease ends and the house is yours.
It’s not all bad though, now that the house is yours, you have equity! An investment this big will surely pay off when the time is right. You could pass the house down to your children, sell it in exchange for something smaller so you can have a cozy retirement, or you could always…. rent it out! The choice is yours.
Now, be prepared to finance whatever remains from the purchase price once your lease has ended. No matter where the market is at that point, you’re essentially taking over the mortgage of the home, and are therefore responsible for making the remaining payments as the new property owner (no matter how many payments are still left). If you have any reason to believe that you can’t handle this new financial responsibility, do not rent-to-own!
How to Watch Out for Common Rent-to-Own Scams
The rent-to-own option isn’t for everyone, but even those that it is for should be cautious. Because even though renting to own is a very completely legal, it’s not always safe. Be wary of shady deals and costly scams. Use these tips to keep yourself safe:
- Shop it around: Before taking action on a rent-to-own arrangement, it doesn’t hurt to stop and do a little online research first. Be sure that you’re getting the best deal before agreeing to buy from the property owner.
- Don’t pay anything upfront: Someone who may be out to scam you will likely request sensitive financial information from you upfront along with a hefty deposit. Don’t jump the gun here. Wait until you’ve seen the property and the contract first.
- Do a little detective work: Perhaps the very first thing you should do is check out the rental property owner and the property itself. Make sure they're legit before going any further into a rent-to-own arrangement. This would include checking to see if they are indeed the owner and also if they're current on all their mortgage and taxes.
- Understand the fine print: This is the part where you may want to lawyer up. You’ll need to make sure that every little detail in the rent-to-own agreement falls in line with what was discussed between you and the owner. Having a lawyer present will make this process a lot easier.
How to Prepare Your Finances
Overall, if you’re ready to buy a home, but your finances are not, a rent-to-own scenario could be a suitable option for you. However, since rent-to-own arrangements can often get very confusing and even downright tricky, it might be best to hold off altogether. Work on shaping up your finances first. Start a budget, maintain a spending dairy, set up an auto deposit for your savings, and even consider taking on a side hustle or two to boost your income. This way, when the time is right, you can feel confident about buying a house the more traditional way. Most rental property owners are either trying to get the most from their investment and may, therefore, charge too much, while others may just be trying to get rid of a property they've fallen behind on.
Perhaps you’ve already found yourself in a rent-to-own scenario where your rent for the remainder of the lease is a little higher than your paycheck can handle. If you ever need to fill the payday gap from these higher-than-usual payments, talk to someone at one of our South Carolina payday loan locations about financial relief options that could be useful. Good luck and happy home buying!