A Rent to Own Guide

Top Misconception About RTO Arrangements

Rent-to-Own arrangements are becoming an increasingly popular method of obtaining a home. They allow someone whose credit score may not be the best to begin paying off the property through renting it first. However, when you type "rent-to-own homes" into search engines, many of the top results may yield naysayers who claim that the entire process is a scam.

Let's be clear: Rent-to-Own home arrangements are NOT a scam, but merely an option that people with less than ideal credit scores can use to purchase homes without using their credit or outside mortgages. The scam accusation comes from people who don't understand the process, so let us clarify things for you a bit.

Here are the top 7 misconceptions about Rent-to-Own homes:

1. If you choose Rent-to-Own, you're in it for the long haul. Rent-to-Own is not for everyone. That being said, we suggest that anyone entering into this kind of arrangement be certain of eventually buying the property they are renting. Get an attorney to draft and represent you when hammering out the details so that you are absolutely certain of the conditions of the contract.

2. Rent-to-Own is the same as renting. Rent-to-Own is renting plus one. In addition to any rent paid to the owner, many times the seller will charge an "option fee" that can serve as part of the eventual down payment depending on the contract. This option fee could also just be used as collateral for the seller to ensure a buyer does not back out of the deal.

3. The Rent-to-Own process is not legally binding. This is a biggie folks. When all is said and done, you are in fact signing a contract to rent a property and at the stipulated time the buyer can choose to purchase the property in question. A buyer does have the freedom to cut ties before the lease agreement is up, but this is not advisable since any accumulated option fees and developed equity will stay with the owner.

4. You can have the worst credit in the world, no money, and still be eligible. Contrary to popular belief, you still need to meet certain qualifications stipulated by the seller of the property. Each owner is different, but typically the ability to come up with the total amount to be paid or the ability to find mortgage lending by the end is necessary. The bottom line is that a buyer must have something to put forward to even catch the attention of the seller.

5. If a buyer backs out of the deal, what happens to the down payment? As mentioned above, the option fee is an additional payment given in conjunction with rent dues, and this fee is kept in escrow by the owner in a sort of financial limbo until purchase time comes around; the deposit is kept in escrow to ensure that the seller maintains a sense of honesty and doesn't simply run off with the accumulated funds when the lease has ended. If a buyer decides to sever the agreement prematurely, they also choose to forfeit all the fees paid thus far.

6. Earning Equity vs. Developing Equity: There always seems to be confusion about the equity accumulated during a buyer's stay in a property spanning the contractual time period. Much like the option fee, any equity developed on the part of the buyer is held in a limbo but ultimately is owned by the seller. Since prices are generally locked in contractually, any extra equity that exceeds the agreed-upon price of the property (usually due to a rise in property value after the initial date when the contract was signed) is transferred to the buyer at the time of purchase and can be accessed after taking ownership.

7. The arrangement is flexible for both parties: Usually when a seller and buyer come to an arrangement and sign on the line, things are pretty much set in stone. In the rare event that both parties agree to alter the agreement, a contract can be re-drafted. A set price for the property is typically agreed upon and must be payed by the buyer at the appropriate time regardless of the fluctuations of the properties value.

Remember folks, Rent-to-Own is a good option when you are having trouble getting approval for a mortgage loan. Just be absolutely sure of the statutes of the agreement before signing the contract.