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Rent To Own - Consider Finance Options Before Signing Agreement
A seller can agree to rent a property to a tenant with an option to purchase, allowing the tenant to rent and live in the residence while guaranteeing the tenant the right to buy the rental property at agreed-upon terms during an agreed-upon time period. In the automotive industry, consumers have embraced the idea of leasing cars with an option to buy. People who have little money to put down or those who want to "test drive" a certain make and model appreciate the flexibility and freedom these types of leases provide. Similar lease-purchase agreements are available in the real estate industry. But if you are considering this renting-to-own option, consult with a mortgage lender before signing any paperwork. Some initial mortgage investigation could prevent any unpleasant surprises from surfacing when it comes time to buy the property.
A seller can agree to rent a property to a tenant with an option to purchase, allowing the tenant to rent and live in the residence while guaranteeing the tenant the right to buy the rental property at agreed upon terms during an agreed upon time period. However, the tenant is never obligated to purchase. The owner, on the other hand, cannot sell the property before the agreement's expiration date. When the lease is signed, both parties also agree on a purchase price for the home. The seller cannot change this figure any time during the lease's term. Perhaps the most significant benefit of this type of agreement for a buyer is value. Since the home's purchase price is determined when the lease is signed, the buyer can reap the benefits of any property appreciation that occurs between the contract signing and the purchase date. Plus, the buyer cannot lose money on the home because he is never obligated to purchase it. If the house depreciates in value during the term of the lease, the tenant can simply choose not to buy.
Leasing also allows the renter to `test' the quality and suitability of a home (and the neighbourhood) without taking the leap into ownership. "Many people in Auckland are adding up what they are paying in rent, and the amount is in the vicinity of $25,000 to $35,000 a year; they’d like to have a practical win-win relationship with their landlord that helps them buy the home, not just rent.," says Brian Gibbons, director of Financial Advantage Limited, of Newmarket, Auckland. "It also gives them more stability if they don't want to move. Having the option of purchasing guarantees they won't have to."
Home sellers can also profit from lease-purchase agreements. "The benefits of a lease-purchase agreement to sellers is that it gives the owner market rent, which is taxable, and also option payment income, which is tax-deferred until the tenant buys the home, " said Gibbons. This is especially important for people who are transferred and need to leave town quickly, before they have time to list and sell their home. It also gives the seller a guaranteed price, so he "knows what he can work with" when looking for another home.
Owners who cannot find a buyer because of a sluggish market may also consider renting with a purchase option. Whether the owner is in Auckland, the Far North, Wellington, Christchuch, Invercargill, or in a rural area of New Zealand, Lease Purchase Agreements from Financial Advantage can sometimes be the best option.
When negotiating a lease-purchase agreement the most important thing to consider is the ability of the buyer to obtain financing for the home purchase. Paul Bright of Loan Plan Limited, Auckland, encourages potential buyers to get pre-qualified before entering into a lease-purchase agreement. "Make sure you can qualify for the loan when the option is to be exercised", says Bright.
Buyer prequalification is in the best interest of both the buyer and seller. A buyer can enter any agreement knowing ownership is a possibility and the seller can take the property off the market knowing that a purchase could actually take place. Loan Plan, like many mortgage lenders, does not charge a fee to pre-qualify potential buyers.
Another factor to consider is option-credits. Lease-purchase agreements can be a solution for first-time buyers or young families who may not be able to afford a down payment on a home. The tenant pays market rent plus an additional option consideration payment that is a paper credit against the agreed purchase price. This credit is only valuable if the tenant-buyer exercises their option by procuring financing. Otherwise it is non-refundable. The tenant buyer, however, has a right to assign the agreement to another tenant-buyer, sell his interest in the property, subject to the owner’s approval.
For example, a renter may sign a lease for $500 a week, and an option agreement for an option payment of $250 a week. There will be approximately 52 times $250 or $13,000 option credit subtracted from the agreed upon future purchase price. Over 5 years, the option consideration payments would total $65,000.
Although not discussed, there are several other things buyers and sellers need to consider when negotiating a lease-purchase or rent-to-own agreement. Legal counsel is necessary if either party has doubts regarding any stipulations of an agreement. Make certain that the law firm is aware of and adept at advising clients on option agreements and option consideration payments.
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