Rent to Own vs Own to Rent
Written on July 5, 2011 by Cheryl Rankins
Buyers can purchase homes without having it being registered to their name. This type of financing is called real estate purchasing. This purchasing is often done when sellers find it difficult to sell or rent, or when purchasers have difficulties in qualifying for mortgages. Real estate investors use lease purchases to avoid a large capital investment. Although lease options are highly beneficial they come with great risk. Investors need to fully understand these risks before entering this field.
Real Estate Options:
A buyer can buy the option of buying a property at a later date. The price of the property charged is that which was when the agreement was signed. During the contract, the buyer rents the property and pays a rent higher-than-market rent. The additional money becomes a down payment. These investments become the first choice of investors when the number of houses on sale is more than the demand of the market, or when it is difficult applying for mortgage loan. Those being denied the mortgage, can use the lease purchase option and pay high rents. This can help in receiving the approval of underwriters in approving future mortgages. Investors can price property at a low a price and in the future jump up the price and sell it to another buyer.
Basics:
Most of the options in real estate options are similar to one another. The purchaser pays the seller some amount, in other words, rents the asset for a certain period of time so as the buyer can buy the asset in the future. The price to be paid is negotiated at the current market value or a future value. The price is usually decided at the time of the contract signing. During the contract, the seller cannot sell the property to any other investor. However, if the buyer does not buy the property the seller can keep any additional money. The buyer can also sell his option to another buyer which is possible due to the fact, there is no holding title.A lease option allows the buyer to rent the property for a certain period with the option of buying the property still alive. This method is for those that do not have enough for a down payment or do not qualify for a mortgage. Rents given are higher than those of the market rates and sometimes add to the down payment. If the buyer does not buy it in the end, the seller keeps all the money.
Lease Purchase:
Lease purchase option results in the buyer renting the property for a certain period of time but with the obligation of buying it in the end. Rents are usually at a market rate. Buyers pay an amount for the option that is not part of the down payment neither refundable in case of withdrawal of contract. During the contract, no other buyer can buy the property as according to the contract, unless the buyer withdraws on the contract.
Pros And Cons:
Buyers have the power to control a property with limited capital. Buyers can buy valuable property or switch property any time suitable, which pockets the difference between the option price and the sales price. In down markets this method is used as traditional methods lose their touch in bringing maximum profits. An advantage to sellers is that the property can bring in profit when its value growth is not expected high. The option premium and the eventual sale results in benefit of the seller. Rents paid can help sellers in applying for additional loans.
A disadvantage is that high percentages of options go unexercised. This is a risk for sellers who intend to sell their property eventually. This option attracts first time buyers who do not have enough capital. Their financial difficulties might increase in the future as the payment of rent is higher than the normal rents. Seller can cheat buyers as well and violate the contract in the end. Buyers must also be aware of the situation if they want to negotiate in favorable terms.
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