A lot of buyers have heard of a land contract or more commonly referred to as a “rent to own” when they’re thinking about buying.
So, let’s dive a bit deeper into what is a “rent to own” purchase option and how does it differ from purchasing a home outright.
A land contract or rent to own purchase option is a contract between a seller and buyer that essentially outlines a purchase plan with X number of payments at $X rate per month.
An easy way to think of a rent to own contract is a vehicle lease. A car dealership will lease a vehicle to a buyer if they make their payments, they can use the car and those payments are accumulating and being applied toward the purchase price. At the end of the lease, the buyer can buy the vehicle outright, lease another or finance the remaining portion.
Rent to own contracts are very similar. They establish a plan for the buyer to make payments that are applied or deducted from the purchase price. The main difference is there is not a lender or bank in the equation, the seller is assuming that role and risk. Sellers know that and often factor that risk into the monthly cost.
From the seller perspective, they may not be willing to take on that risk. That is why many sellers prefer to sell outright to receive their funds in full without receiving monthly payments and potentially having legal concerns arise years down the road.
Rent to own purchase options may seem more attractive to some because they don’t have the lender piece in the puzzle with “stricter” guidelines for acquiring a loan. That may be appealing to buyers with lower credit or little to no down payment saved up. The buyer may still have a good income and can support a monthly payment, but are not able to get a loan from a lender or bank.
The concern arises if you cannot make your monthly payments to the seller, the contracts are often written in a way that allows for the seller to recoup their property, leaving the buyer in a “rental-like” situation, making payments for years but not gaining equity in ownership. All land contracts vary, but it’s highly recommended to have a real estate lawyer draft and review a land contract prior to signing.
One of the first steps in buying a home is figuring out the financial piece. What can you afford? Can you obtain a pre-approval and loan at this time? Are there a few steps you can take over a few months to improve your credit?
If the finances aren’t in a place needed for a purchase right now, it’s still helpful to connect with a good lender who can help identify opportunities for you to improve your credit and that will result in a better rate down the line.
We hope this resource is helpful to you. If you have questions or want to learn more, please contact our team.
