1. Find a Rent-to-Own opportunity
Search the best rent-to-own homes near me on Foreclosure.com using our comprehensive database and find your ideal rent-to-own home today! Some people look at other listing types on our site such as Pre-Foreclosures to see if it could be available as a Rent-to-Own as well. However, additional diligence will be required to determine if this listing can be approved as an RTO.
Please take note that this property is not listed as a Rent-to-Own (RTO) opportunity. It is currently in the initial default stage, commonly referred to as a Pre-Foreclosure, indicating that the homeowner has missed at least one payment and is considered delinquent. However, instead of going through a potentially lengthy foreclosure process, which could take up to 18 months, the homeowner may be open to considering a Rent-to-Own option that covers their mortgage.
Since Pre-foreclosure properties are not formally listed for sale, there is no asking price available. Instead, you’ll find either the original loan balance or an Estimated Market Value (EMV) provided. To make a reasonable offer for this home, it’s advisable to use either the loan balance or EMV amount in conjunction with local sale price comparables to determine an appropriate offer. Alternatively, the homeowner might be willing to work with you on a monthly amount that can help them avoid the foreclosure process.
You may also want to check with an attorney to discuss the potential risks of executing a Rent-to-Own agreement with the current owner of a Pre-foreclosure. If the current owner doesn’t make their mortgage payments, they could lose the property which would directly affect you and your Rent-to-Own agreement.
For this reason, a good number of buyers collaborate with (i) real estate brokers or (ii) local real estate investment clubs to connect with local investors or (iii) with lending companies that specialize in Rent-to-Own financing, such as Home Equity Partner, Divvy Homes, HomeLight, Verbhouse, and Trio. The investor strategy is to provide relief to the home owner in Preforeclosure, buy purchasing the home and paying off their loan balance. The investor, then signs a Rent-to-Own agreement with you as the new buyer. Here’s how it works: Let’s say someone is having trouble paying for their house, and they might not be able to keep it. An investor or an investment company could step in and buy the house from that person before it goes to a foreclosure auction. Once they own the house, they might offer you a special kind of deal called a Rent-to-Own agreement.
Commonly used Rent-to-Own agreement terms are, that you can rent the house from the investor or company for a certain period of time, and during this time, you might have the chance to buy the house from them if you decide you want to. Part of the rent you pay might go toward the future purchase of the house. The most common agreement types are Lease-Option or Lease-Purchase. The main difference between the two is that Lease-Option gives you the choice to either buy, continue to rent or walk away from the property at the end of the term.
However, before you agree to anything, it’s incredibly important to talk to a lawyer who specializes in these kinds of deals. Lawyers can help you fully understand all the details and terms of the agreement. This way, you can make sure you’re making a smart decision that’s right for you and your situation. So, always remember to seek legal advice before you finalize any agreement like this.
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2. Get a home inspection (Skip if using an Investor)
It’s normally not necessary to commission a home inspection on a traditional home rental, but remember that Rent-to-Own is not a traditional home rental. This is a short and long-term investment that requires the utmost attention to detail. And the small upfront cost of a home inspection could save you literally thousands down the road. Therefore, hire an independent home inspection professional to uncover any problems the house may potentially have. It’s important to do this even if the current homeowner furnishes a disclosure statement that attests to the condition of the home. If the independent home inspector points out problems, it’s important to determine whether or not the issues will prevent you from getting a future home loan once the Rent-to-Own term ends. Therefore, make sure the agreement specifies who is responsible for making the necessary repairs discovered during the inspection prior to finalizing the Rent-to-Own agreement. The homeowner might offer a credit off the final purchase price at the end of the Rent-to-Own in lieu of payment for damages. Either way, be sure to get everything in writing before finalizing a Rent-to-Own agreement.
Download Our Free Rent To Own Infographic
3. Negotiate fair terms
It’s critical to sign an agreement that is in your best short and long-term interests. The Rent-to-Own option will cost more than a traditional home rental because there are other costs baked into the monthly amount. The good news is these “other costs” such as the initial option fee and monthly credit will go toward the final purchase price. Nevertheless, a Rent-to-Own agreement should always include the length of the Rent-to-Own lease agreement (usually anywhere from 12 to 70 months), the amount of initial option fee (usually 35 percent of final purchase price), the final purchase price at the end of the term, and the amount of the monthly payments that will go toward the purchase price. These figures are all negotiable..
4. Review the agreement
It is highly recommended that you hire a real estate attorney to review the Rent-to-Own agreement and that you understand all the terms and conditions of the agreement. In addition, be sure to contact a home insurance agent to determine the coverage that you will need. Indeed, now that you have an interest and will be invested in the home, you may require additional insurance to protect it.
5. Execute the agreement
Once you fully understand all the terms of the Rent-to-Own agreement — and have had an attorney look it over and provide feedback — it’s time to finalize the deal. Of course, signatures from both parties will be required at this time, as well as upfront payments such as the agreed-upon “option fee,” the monetary consideration that is necessary to make the Rent-to-Own agreement binding.
6. Make monthly payments
Rent-to-Own homes will typically cost a bit more than the fair market value of other home rentals in the area. That’s because a portion of the monthly Rent-to-Own payment will be designated as a “rent credit” — up to 20 percent of the monthly amount due — will go toward the purchase of the home when the agreed-upon term expires. It’s important to make these monthly Rent-to-Own payments on time and as scheduled.
7. Start planning (for end of agreement)
As the end of the Rent-to-Own agreement nears, it’s a smart idea to address any minor problems that the home inspection turned up. It’s also a good idea to make small cosmetic improvements and upgrades as needed, if possible, to help increase the value of the home prior to applying for a mortgage loan. It’s called sweat equity … and it can make a big difference when it’s time to negotiate favorable mortgage loan terms.
8. Apply for a mortgage (at end of agreement)
Part of planning for the end of a Rent-to-Own agreement is identifying a mortgage company that can help you finance the balance of the home loan. The mortgage company will:
- Run your credit
- Verify your employment
- Verify your income
- Verify your debt-to-income ratios
9. Close on your new home!
Once you have satisfied the terms of your Rent-to-Own agreement, made improvements to the property, lined up your home loan financing and closed on your Rent-to-Own home, the last thing you need to do is celebrate — You are now a proud, new homeowner. Congratulations!
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