How does Rent-to-Own Homes Work?

Ben Spofford, President Realtyrto

Step1

What is rent to own real estate? Rent to own (also known as simply rto) is a realestate term relating to an agreement between a buyer and a seller of a parcel of real estate. RTO has many themes and variations and is known by manynames, such as lease with an option to purchase, owner financing, landcontract, owner will carry, rent with option, and seller carry back. It is in thelanguage of the lease to buy agreement where the parties to the transactionspell out exactly what it is that is being transacted- this is a very importantdocument.

Step2

Owner financing is when an owner of a property treats the sale of real estate asif the seller were the bank. This is where the seller creates a mortgage note and the buyer treats it exactly like a bank loan with a rate, a term and a loan amount. Generally seller financed real estate gives the buyer the complete title to the property. For a buyer it can be assumed that this is the best position to be (titled owner) but it really depends on theagreement and the local laws. It is a very common approach and generally very successful if done properly.

Step3

Land contract, contract for deed. The seller that offers a sale on a land contract has many benefits for the buyer and seller alike. A land contract is generally a recorded document (mayor may not be a requirement in your state.) The land contract should spell out the buyersrights to obtain the property in title or deed of trust. This contract should include all theagreements and terms of transfer between the buyer and seller. It is highly recommended tohave the agreement reviewed by an attorney in your state who is competent in this form of contract.

Step4

Rent-to-own, rent-to-buy, lease-to-own, lease option. The rent to own home or lease to ownagreement is basically an option. With a standard rental agreement there is a separate formthat gives the buyer the 'option' to purchase at a later date. In most cases a buyer should haveat least good credit, but not always. The reason for good credit is that at some point inthe future the renter will need to qualify for a bank loan. This time element allows the buyer to enroll with a credit repair program. This is the most common agreement for rent to ownhome ownership.

Tips & Warnings

* Have a down payment (bigger the better)* Enroll in credit repair if necessary* As of this writing homes are a bargain (February 8, 2009)* Beware the ‘ghost’ contract that steals your money* Don't fall victim to the craigslist scam* Never buy a home without the 25 point inspection