7 Traps to Avoid When Signing a Rent-to-Own home Agreement
When you're looking for a home, the process can be daunting. You want to find a place that you can call your own, but the process of buying a home can be complicated and expensive. For many people, the answer is rent-to-own. This type of agreement can be a great way to get into a home without all the complications of buying, but there are some traps that you need to avoid.
What is a rent to own agreement?
A rent-to-own agreement is a type of lease that allows you to rent a home with the option of purchasing it at a later date. In a rent-to-own agreement, you pay a portion of the purchase price in addition to your regular rent payments.
For would-be homeowners who don't have the credit or cash to buy a property outright, a rent-to-own home agreement can seem like a perfect solution. You get to move into the home you want and start building equity while also saving for a down payment.
While this may seem like a great way to buy a home, there are potential pitfalls that can leave you house-poor and even homeless. Here are seven traps that you need to be aware of before signing on the dotted line:
Trap #1: the home may not be yours at the end of the lease
Trap #2: the home may not be in good condition when you move in
Trap #3: the buyer could be responsible for maintenance and repairs
Trap #4: the option period may be too short
Trap #5: the price could have hidden fee
Trap #6: the contract may include an "escalation clause"
Trap #7: the agreement may include an early termination fee
Trap #1: the home may not be yours at the end of the lease
Don't assume that the property is yours. Just because you're paying extra each month doesn't mean you have any ownership rights. Unless you have a legally binding agreement, the landlord may have the right to sell the home to someone else or terminate your lease at any time, and you could be left without a place to live. If this happens, you could be forced to vacate the property with little or no notice.
Trap #2: the home may not be in good condition when you move in
Another potential problem is that the home may not be in good condition when you move in. The previous tenants may have left it in a state of disrepair, and it could take some time, effort and money to get it into livable condition. If you are not handy, or if the house needs extensive work, you may want to reconsider buying it. Be sure that you can afford to fix any problems that need attention before moving in.
Trap #3: the buyer could be responsible for maintenance and repairs
One of the most important is making sure you understand who is responsible for maintenance and repairs on the property.
In most cases, the tenant is responsible for maintaining the property and paying for any necessary repairs. This includes things like fixing a leaky faucet or broken window, as well as general upkeep like mowing the lawn and shoveling snow. In some cases, the landlord may be responsible for major repairs, such as a new roof or furnace.
To avoid this trap, be sure to read the fine print of your agreement carefully. If there's any mention of repairs, make sure you understand who will be responsible for them (and how much they'll cost). Otherwise, you could end up being stuck with a hefty bill - and a home that's not in the condition you thought it was.
Trap #4: the option period may be too short.
When signing a rent-to-own agreement, be aware that the option period—the amount of time you have to buy the home—may be too short. The average option period is one to three years, but it can be as short as six months. That may not sound like a big deal, but remember: You’ll likely need time to sell your current home and arrange financing. If you don’t have all that figured out within the option period, you may end up paying rent for longer than you planned—or default on the agreement and lose any money you’ve already put toward the purchase price.
Trap #5: the price could have hidden fees.
Before signing any rent-to-own agreement, be sure to read the fine print carefully. Another issue is that the rent-to-own agreement may not be as straightforward as it seems. There may be hidden fees or other terms that favor the landlord or seller. Many leases include clauses that allow the landlord to charge additional fees, and these can add up quickly. Be sure to ask about any potential fees before signing the lease, last thing you want is to be surprised by a big bill later on.
Trap #6: the contract may include an "escalation clause"
In most cases, the purchase price is set when the contract is signed. However, it is possible for the seller to increase the price during the contract period. The contract may include an "escalation clause" that raises the price of the home beyond its market value.
An escalation clause is a common feature in rent-to-own home agreements. This clause allows the price of the home to increase beyond its original mark, typically in increments of a few percentage points each year. While this may not sound like much, over the course of a few years, the price of the home can increase significantly. For example, if you agreed to an escalation clause that raised the price of your home by 3% each year, after three years, you would be paying 9% more for your home than you would have originally.
While an escalation clause may not seem like a big deal at first, it can have a significant impact on your budget over time. If you're not careful, you could end up paying hundreds or even thousands of dollars more for your home than you originally planned. Be sure to keep an eye on the purchase price and make sure that it does not increase unexpectedly.
Trap #7: the agreement may include an early termination fee
Be sure to read the fine print of your agreement carefully. Some agreements include an early termination fee, which could be several hundred dollars. If you think there's a chance you might need to break the lease early, make sure you're comfortable with this fee before signing the agreement.
But the most important Trap to avoid is -- not having a clear understanding of the contract.
Make sure that you understand all of the terms and conditions before you sign anything. Read it over carefully, if there is something that you do not understand, be sure to ask questions. You may also have a lawyer look at it if necessary.
Conclusion
When you sign a rent-to-own agreement, you may think you're on your way to owning your own home, the process can be both exciting and overwhelming. While this can be a great way to become a homeowner, you need to be very careful when signing the contract and be mindful of these 7 traps.
These traps can be avoided by doing your research, reading the fine print, and understanding all of the fees involved. If you are unsure about anything in the agreement, be sure to get clarification. Don't sign anything that you don't fully understand. And to protect yourself, be sure to get everything in writing and have a lawyer look over the agreement before you sign anything. Doing so will help you stay on track to becoming a homeowner!