Rent-To-Own Overlooked Home Option Options Give Tenants A Way Of Occupying Home, Saving For A Down Payment

One of the most underused tools in real estate has to be the rent-with-option-to-buy strategy.

Often misunderstood, the rent-withoption allows tenants who want to be home owners to set aside a portion of their rental check against the purchase price or down payment on a house while at the same time occupying the property for what amounts to a trial-run period.

John McGannon thinks more people should get into the rent-to-own market. A member of the Illinois Bar, McGannon is president of HomeBase Inc., an Oakbrook Terrace, Ill.-based real estate company that specializes in the location of rental homes.

“Many renters think they cannot afford to buy a home because they do not have a down payment or cannot obtain a mortgage,” McGannon said. “Renters in this position, however, do not need to throw their money away on rent each month.

“A rent-with-option also allows a tenantbuyer to live in a house before deciding to purchase it. In this way, a buyer can check out a house and a neighborhood for any potential shortcomings before committing to a long-term investment,” he said.

In a typical rent-with-option arrangement, a tenant agrees to rent a house for a specified period, usually one year, and is granted an option to purchase the property at the end of that period for a price agreed upon at the time the contract is signed.

In addition to negotiating the price and the length of the option period, the landlord-seller and renter-buyer also come to an agreement on what percentage of the monthly rent payment will be credited toward the eventual purchase.

In exchange for the option of buying the house in the future, the renter is asked to make a non-refundable lease-option payment of some amount, usually a fairly substantial sum, say $1,000. The option payment, much less than a down payment, is essentially good-faith money that compensates the seller for tying up the property should the renter decide not to exercise the option.

It is the allocation of a portion of the rental payment to a purchase account that is the primary benefit of the option. Essentially, a tenant is allowed to build up what will become equity in the property during the rental period without paying anything above the monthly rent.

McGannon recommends that anyone negotiating a rent-with-option agreements focus on several key issues:

Determine at what point the tenant must exercise the option to purchase. Although one year is common, options can run for as little as three months or as long as three years.

Negotiate the portion of monthly rent that will be allocated toward the purchase. McGannon says 20 to 30 percent is fairly common, but deals can be made in which 50 or even 100 percent of the payments are credited against the eventual purchase price.

Check with a mortgage lender if you think you will seek conventional financing to complete the purchase. Mortgage providers do not all view rent-with-option transactions the same.

Although there are model rent-withoption agreements, remember that in these transactions everything is negotiable.