The rent-to-own process can be a big boon for property owners. It’s a great way to bring in additional income and keep someone in a property when you aren’t living there yourself. But anything that sounds too good to be true probably is. Before you dive into a rent-to-own agreement, consider all the pros and cons that could impact this arrangement. Want to know more? The Colorado Springs real estate team at Holly Quinn & Associates is here to help; give us a call to get personalized information today!
How Rent to Own Works
A rent-to-own agreement is pretty straightforward, at least at the outset. In this type of agreement, the property owner and renter agree to a set term of rental time. At the end of that time, the renter is given the option to buy the property.
Of course, the devil’s in the details. Rent-to-own agreements often come with a stipulation that the renter will pay additional money each month, and the additional payment will go toward the eventual purchase price. Some renters will even make a lump-sum payment upfront that will go toward the eventual home purchase.
Rent-to-own agreements are generally a “lease option agreement” or a “lease purchase agreement.” In the former, the renter has the option to purchase the home, whereas in the latter, the renter is contractually obligated to purchase the property. While a “lease purchase agreement” may sound like the sale is guaranteed, there are still several circumstances that can impact this arrangement as both the owner and the renter.
Pros of Rent-to-Own Agreements for Sellers
Invested/Guaranteed Buyers
One of the more worrying aspects of the traditional home-selling process is the worry that buyers will back out at the last minute, for one reason or another. No matter what the reason, these situations are fairly common — and can cause a rippling wave of struggles for you as sellers. Going the rent-to-own route is a way to make sure you have an invested or guaranteed buyer at the end of the process. After all, if a renter has been paying toward the purchase price of the home already, they’re much more likely to choose to invest fully. Similarly, an invested renter is more likely to take care of the property and work to get along with the neighbors. And, of course, if you enter into a lease purchase agreement, the renter is contractually obligated to buy the property at the end of the rental period.
More Time to Sell
If you know you want to sell your property sooner or later, but you aren’t ready yet, setting up a rent-to-own agreement is a good way to give yourself a cushion of time. Better still, it’s a way to earn income on the property while you wait. This might be the ideal solution for a property that, for example, is entailed as part of a will, or one owned by multiple people. It can be a good way to earn some income while taking the time you need to get squared away before selling.
Broader Scope of Buyers
When selling a property the traditional way, you may notice that you don’t get a ton of potential buyers through the door. If you’re looking to get a greater scope of buyers, rent-to-own agreements give that freedom. Many people would like to buy but may not qualify for a loan for various reasons. Since rent-to-own agreements offer greater financial flexibility, you can open up your property to more interested parties.
Higher Asking Price
In many cases, the property owner can ask for a higher sales price when taking on a rent-to-own agreement. Since the renter will get the first right of refusal to buy the property, many owners can ask for a higher price in exchange for that flexibility. Also keep in mind that many rent-to-own agreements come with a price lock, so you may include the higher sale price in anticipation of rising rates in your local market. Just don’t go so high that the renter can’t get a loan approved. Your local Realtor will be knowledgeable about local market trends and be able to help you set a good price.
Cons of Rent-to-Own Agreements
Of course, rent-to-own agreements are not all sunshine and daisies. There are a few provisions and situations that may make you reconsider this setup. While they may not be deal-breakers, it’s important to go into any real estate transaction with an awareness of potential pitfalls so you can make an informed decision.
No Guarantee of Financing
Whether you have a lease option agreement or a lease purchase agreement, the renter is generally guaranteed first right of refusal when it comes time to sell the home. However, it’s important to keep in mind that just because a renter has agreed to purchase the home according to the agreement, it doesn’t mean that they are guaranteed to receive financing. If you have rented your home to someone with poor credit, or if housing prices have fluctuated too much, it may mean that your renter cannot purchase the home simply because they can’t get approved for a loan.
No Certainty of Purchase
Lease option agreements give the renter first right of refusal at the end of their rental term, but it does not guarantee that they will choose to purchase. As we touched on above, even a lease purchase agreement can fall through, despite the contractual agreement to purchase. During the rental period, it can be hard to balance your responsibilities as a landlord with the financial obligations. You may find that you need to take care of more repairs or upgrades in order to entice your renters to purchase at the end of the agreed upon time.
The other big consideration is that the purchase can fall through because of issues on your end, as well. Situations like foreclosures or tax liens on the property can make it so that you do not have the option to sell, even if you want to. If you think concerns like this could arise, it’s a good idea to discuss with your Realtor or financial advisor before proceeding.
Lack of Appreciation
When you set up a rent-to-own agreement, typically the home’s sale price will be locked in at that time. In areas that see a lot of housing market growth, like we do in the Colorado Springs area, this can be a pitfall for you as a seller because it means you may not get to enjoy the home price appreciation that a traditional home sale would bring you. It is fairly common to lock in a sale price that is slightly higher than current pricing trends, in anticipation of appreciation, but this is something that will need to be discussed with your real estate agent and the renter to ensure a fair price.
Fluctuating Home Prices
The housing market can also play a role if local prices fall, too. On your side of the transaction, it can feel like a boon to lock in a higher price when the cost of homes around you may fall, or fail to rise as quickly. However, keep in mind that your renter will still need to be approved for a loan. If the property is priced too high, your renters may not get approved because the property appraises at a lower value, and many lenders will be picky about writing a larger loan.
The other aspect to this is, of course, that most home sellers with the option will want to wait for the most opportune time to sell for top dollar. If you have the freedom to wait, that’s great — but more time doesn’t necessarily mean a higher price. It’s always a good idea to connect with an experienced, local Realtor to discuss housing market trends. They may advise you to sell sooner or to wait, depending on what property price trends have been and are anticipated to be in your area. Remember that everything from national economic trends to local building plans can impact these trends, and a real estate agent will have more insight into this.
Home Repairs/Discovering Flaws
There is always some level of assumed risk when purchasing a home. We insist on home inspections as part of the home buying process to minimize that risk, but there is no way to guarantee that a home is in perfect condition. Rent-to-own properties offer a “try before you buy” benefit to renters. Living in the home gives them a chance to see how they fit in the space, and to experience any quirks the property might have. As the owner, this could work as a detriment because the renters could decide that those quirks are not something they can live with — or they may ask you to take on the financial side of handling the repairs before they buy. Do keep in mind, though, that if certain repairs are needed, you would need to disclose those to buyers even if you are not doing a rent-to-own deal.
Weigh Your Options Carefully
When it comes down to it, there are some definite upsides to the rent-to-own process, but some of the hurdles may be deal-breakers for you. The best thing you can do is to make an informed decision so you aren’t surprised by any struggles that could come up. The best thing you can do is to work with a local Realtor who knows the ins and outs of the local housing market and can advise you about any issues you may encounter. If you’re considering a rent-to-own agreement instead of a traditional home sale in the Colorado Springs/Pikes Peak area, the real estate team at Holly Quinn & Associates is here to help! Connect with us today for experienced, local guidance with all of your property sales decisions.
