AN EASIER WAY TO GET BACK INTO HOME OWNERSHIP!
Rent-To-Own, often called a Lease Option, is a pair of contracts, a standard lease agreement and an option to purchase agreement, under which you rent/lease the home with a future option to buy. It can be a brilliant choice for the family in need of just-that-little-extra-time to qualify for a loan. And with no guarantees in the real estate market, locking-in a purchase price will likely prove to be very advantageous. Although, as explained in the next paragraph, we increase the purchase price on an annual basis, you will know at the time of entering into the contract exactly what the purchase price will be at any point in time.
The Lease Option process: Using one of several methods we will set a purchase price for the property, a monthly payment amount, and amount to be credited to the purchase price, and the time frame within which you must obtain bank financing. A Lease Option is not long term financing, you must qualify for a bank loan within a set number of years, usually 2-5 years. One of our requirements is that if you have credit issues you MUST seek help from a credit repair or a credit counseling service. We have 2 such companies that we can recommend or you can make your own choice, but you must document to us that you have entered into such an agreement.
One method used is to set an initial purchase price at a figure just slightly above the current market value. On each annual anniversary date of your option contract the price will be raised a set percentage from the existing agreed purchase price, usually a figure below the average appreciation rate.
Note that the average appreciation rate is around 3.5% and it is unusual for the rate to move down, at least for any length of time. Normally over a 4 year period even if there has been a short time frame when values fell the overall average will usually be at or above the 3.5%. This gives you built in equity in addition to the equity gain from the down payment and additional option money you’ve paid over the term of the option.
One of our major reasons for using this method is it gives you, the buyer, an additional incentive to get your financial situation cleared up as quickly as possible to enable you to conclude the purchase of your home asap and gain the full appreciation of your home.
BASIC LEASE OPTION GUIDELINES
- No tenant evictions in last year except in the case of foreclosure, short sale, etc.
- Debt ratio = All monthly payments including projected rent can not exceed 43% of gross income.
- Minimum Household Income =$3,500/mo ($42,000/yr) OR 3 X the monthly payment, which ever is greater.
- Credit Repair = If you have any credit issues we will require you acquire the services of a credit repair or counseling service. We want to be sure that every effort is made to ensure you are able to purchase your home as soon as possible within the option time period.
- Lease Time Periods = 2 years with guaranteed renewal in 1 yr increments until buyer can obtain financing if there have been no violations of the lease agreement during the expiring term. Should it become necessary to extend the lease beyond a total of 3 years an adjustment to the terms may be required based on the original contract terms
- Option Money = Minimum $3,500 or 3% of purchase price whichever is greater.
- Monthly Rents to be based on selling price of the home as follows:
$100K = $800 to 1100/mo
$150K = $1100 to1400/mo
$200K = $1400 to 1800/mo
$250K = $1700 to 2200/mo ($2070 + $230 Option)
above $250K = TBD based average rents in the area plus 10%
- Option Time Period = 4 years or 30 days following the property being vacated. (Option can & should be exercised as soon as the tenant/buyer can obtain financing).
HOME WARRANTIES – All of our homes come with a one year home warranty paid for by us. There is a small service charge for any warranty service that is the responsibility of the tenant buyer to pay. This charge is usually very minor such as $50 normally but the amount does vary depending on the home. The second and subsequent years become the responsibility of the tenant buyer and we strongly recommend the warranty be continued as it can be quite expensive having repairs made.
- Does any of my monthly payment go toward the purchase price? Yes! You are building equity in your home while you rent. A minimum of $100 of your monthly payment will be added to your down payment. You may choose to pay an additional amount monthly if you choose. For example, if $100.00 goes toward your down payment each month, at the end of a one-year term, you will have added another $1,200.00 to your down payment, ($100.00 x 12 months = $1,200.00). Through the Lease Option process, your down payment will increase as your payments accumulate each month.
- Is a down payment required? YES and NO! In a Rent2Own there is no down payment at the inception of the contract, instead you pay a non-refundable option fee to have the option to purchase at a predetermine price within a predetermined time frame. When you exercise the option and purchase the property the fee is applied to the purchase price at which time it becomes a down payment. It should be noted that IF you are also paying any additional monies monthly toward the option those monies are also non-refundable should you not exercise your right to purchase the property.
- How much is the option fee? That depends. A large accumulated down payment will help tremendously when you’re working with a bank for long term financing. You should offer as much option money as you can afford, so that we may get a home in your name as soon as possible. Our minimum amount required is $3500 or 3% whichever is greater. Higher accumulated option monies credited to your down payment will put you in a much better position to obtain financing when you exercise your option. However, you should know that if you fail to qualify for bank financing within the term of the lease, your accumulated option money WILL NOT be refunded.
- I have horrible credit. Can you help me? Most likely, yes. Depending on how much you can afford for the option fee, how bad your credit is and more importantly what caused your credit problem and what have you been doing to try and correct the problem, we should still be able to get you into a property. When you enter into an agreement to purchase from us we do require you contact a Credit Repair Specialist or Credit Counselor to assist you in resolving your credit issues. We want you to be successful in ultimately purchasing your home and will help you in any way we can. We can put you in touch with a Credit Repair Specialist if you want who can assist you in finding a credit solution. Please see the next section for additional information.