Which is better – to live in a lease instead of your own house, rent or buy houses right away? The answer, like many questions of this kind, depends on many things. Everyone’s personal circumstances are different, and a decision should always be made based on those circumstances.
When I was eating a hamburger at a local burger, my sheriff friend recently told me:
“I think I need to buy a house. I’ve been renting for a while, but I feel like I spend money on rent every month… “
He is in his 20s, he can’t wait to live “American dream” but doesn’t realize that home ownership is a little more difficult (we have been homeowners for over fifteen years).
I also understand where he is from. We rented for twelve years before starting our dental practice and felt just like my friend every time he paid the rent.
Home ownership is a goal many tenants aspire to, but there are a couple of things that hold them back:
- savings on down payment
- good credit rating
Enter a possible solution: renting your own home.
At first glance, this sounds like a great deal. But any financial decision has its pros and cons.
Today we’re going to discuss the basics of renting your own home to determine if it’s right for your situation.
How does renting your own home work?
Contract
Two separate contracts must be signed:
- Lease contract
- The possibility of buying on lease
Lease contract
The lease is the same as a standard lease with the rent specified, but the difference is the agreed period for a potential home purchase.
This usually ranges from one to three years after the conclusion of the agreement.
Home maintenance with buyout
One thing tenants should look out for is whether the landlord is covering the cost of maintaining the home or not.
Sometimes the terms of the contract specify that the tenants are responsible for paying for the repairs and the maintenance of the property.
If someone is having difficulty trying to find out this information, consider asking a lawyer to review the contract.
Rent / purchase option
Another thing to consider in the agreement is whether the house is rent-purchase or rental option…
When you first read about the two, they seem similar, but there is a BIG difference to look out for.
- A rental option it’s just like that. This gives the tenant the option / opportunity to purchase the house before the lease expires.
- A rent-purchase legally obliges the tenant to buy a house at the end of the lease.
Oh, how a one word difference (buying) can make a big difference!
With the lease option, the owner gives the tenant a first rate to buy the house equal to the lease term under the lease.
For example, if the lease term is two years, then the tenant has two years to purchase without worrying about another potential buyer getting into a situation.
But you have to pay for it. And this cost is called an option commission, which ranges from 2% to 7% of the purchase price of the home.
The good news is that this fee is usually returned on the home purchase account after the contract expires. Unfortunately, if the tenant changes his mind and decides not to buy the house, then this money will be lost.
How much rent do tenants pay?
Everything in life can be discussed. This also applies to the option of renting your own home. Make sure you discuss this with the owner before signing any agreement.
It is not uncommon for tenants to pay 15-20% more for rent. But remember that this “additional” amount will be credited towards the future down payment on the house.
Example
Bill signs a three-year rent for his own home in the area where he would like to live for the next 15+ years.
The purchase price is $ 100,000 and the option fee of 3% ($ 3,000) is payable upfront.
His monthly rent is $ 1,000 and 20% ($ 200) goes towards buying a house every month.
When Bill’s three-year lease expires, we can assume the following:
The purchase price of $ 100,000 is reduced by the $ 3,000 option fee, resulting in a price of $ 97,000.
If we deduct the rent ($ 200 for 36 months), it drops even further to $ 89,800.
Pros and cons of renting your own home
Depending on which side of the deal you are on (buyer or seller), there are several pros and cons to note.
Here is some of them:
Pros for buyers
Renting your own home is great for those who are struggling to get a mortgage in the traditional way.
This is due to either insufficient credit rating to approve the mortgage or not having enough savings for the down payment (or both).
Those buyers who need help with one or both of the above conditions can take advantage of the extended period of time to build equity in the home as well as improve their credit score.
Pros for sellers
The option of renting your own home is also beneficial for sellers. How? First, they can find a tenant who has a long-term goal of buying their home.
Not only will they have someone more likely to take care of the property as if it were their own, but they will also be protected by an option fee (non-refundable) to help offset the risk if the buyer terminates the lease.
The seller also wins by potentially having more money in his pocket, as the option to rent his own home usually has a higher selling price.
Another advantage is the savings in the commission they would otherwise have to pay to the realtor to sell the house (usually 3-6% of the purchase price) compared to selling in the traditional way.
Cons for buyers
remember, that rental option gives the tenant the option to purchase a home before the lease expires. Even though this is stated in the contract, it does not guarantee that the mortgage will be approved.
If, during the rental period, the tenant fails to make an adequate down payment and / or improve their credit rating, they may lose the additional money they paid towards the property.
This is why it is important to meet with the mortgage lender before signing any contract so that you know what the possible consequences might be.
Another disadvantage that a buyer can potentially face is related to price… To get a fair price and help prevent a significant drop in value, home price surveys and hiring a home surveyor must be completed prior to signing the agreement.
Something else that can easily be overlooked is financial situation… The buyer runs the risk of losing both the money that goes into the purchase price and the purchase opportunity if the seller loses the house due to poor financial situation.
Checking the seller’s credit report and preliminary search by name allows the buyer to see how long the seller has owned the property. Typically, the longer they own it, the more capital is created, which improves the situation.
Cons for sellers
The biggest disadvantage of the seller is one of the advantages of the buyer (rental option). Let me explain further.
If the seller receives an offer for the house (full price or higher) during the rental period, then he will have to refuse it, since the tenant gives him the first bid to buy the house.
How to find homes to rent
One of the best sources for finding home rentals is online.
You can try searching on sites like:
One of the disadvantages of these sites is that you have to pay a commission before the details are published.
Another option that turns out to be free is Craigslist. Just look for “property lease “ in your area of interest. I tried my zip code and it turned out to be 14 ads.
Another thing to consider is finding homes that have been sold over a long period of time in the area you would like to move to.
You have nothing to lose by asking the seller if they are considering switching to a lease in exchange for their own option. They might like this idea because you never know what their financial situation is. They may have already moved and are tired of paying a second mortgage for an empty house.
The worst they could tell you is no.
Final thoughts
As someone who has been a homeowner for about twenty years, I understand the costs and upkeep of a home.
Yes, real estate is an investment and will be appreciated over time, but consider buying because you want to make a lifestyle change, not think of it as an investment.
This article originally appeared on Your Money Geek and has been republished with permission.