What is a rental option?
A rental option is an agreement that gives the tenant the choice to buy the rented property during or at the end of the rental period. It also prevents the owner from offering the property for sale to someone else. At the end of the term, the tenant must either exercise the option or give it up. A rental option is also known as a rental option.
How a rental option works
A rental option gives the potential buyer more flexibility than a standard hire-purchase agreement, which requires the tenant to buy the house at the end of the lease. The price of the house is agreed in advance by the buyer (the tenant) and the owner. The price is generally at the current market value of the house, which allows the tenant to buy the house in the future at today’s prices. For this option, the owner is generally charged an initial fee by the owner, which could be 1% of the sale price of the house. The costs go to the deposit if the tenant decides to buy the accommodation at the end of the lease.
The rental option is particularly useful for those who could build their credit or who do not have enough savings for a down payment. However, there are several characteristics of rental options to consider.
The owner charges a premium in addition to the standard monthly rent for the purchase option at the daily price at the end of the lease. The premium can be a percentage added to the current market rent, such as 10% of the standard monthly rent for a house of this size. The additional amount or premium, often called rent credit, is part of the down payment for the house if the option is purchased by the tenant to buy the house. However, the tenant loses the extra money paid above the standard rent if the house is not purchased at the end of the lease.
Some homeowners may take a single cash payment, often called a “valuable consideration,” which is similar to the premium paid for an option in the financial markets. It is not a deposit upon purchase of the property, which means that it is not refundable. The amount varies from $ 100 to 5% of the expected purchase price.
Bank financing with rental option
The good news for tenants is that, typically, banks will allow total premium funds above rental payments to pay the down payment for the purchase of the home. However, if the rent requested was a market rate, the bank cannot authorize the application of any of the funds at the purchase price. It is important that buyers check with several banks to determine their policies regarding the financing of a mortgage for a house with a rental option.
The duration of a rental option
The term of the option can be any period over which the owner and the tenant agree, but it is generally one to three years. The rental option contract also stipulates the purchase price of the property at the start of the lease or how this price will be determined at the end of the option.
Key points to remember
- A rental option is an agreement that gives the tenant the choice to buy the rented property during or at the end of the rental period.
- A rental option also prevents the owner from offering the property for sale to someone else.
- A tenant usually pays a certain percentage above the standard monthly rental amount, which goes to the down payment for the purchase of the home.
Reasons to use a rental option
There are several reasons why the tenant and the landlord can make a rental option. It is important to determine whether the benefits outweigh the disadvantages of entering into the agreement.
Why Tenants Make a Rental Option
A potential buyer may have many reasons to use a rental option rather than buying the property directly at the start. A major consideration is not having enough money or credit to make the purchase. Renting can allow the potential buyer to save money for the purchase and, at the same time, increase their credit by making regular and punctual payments.
The tenant has the option to buy a property in the future at today’s prices. If the tenant does not have the money saved today to buy the house, but is concerned that the value of the house will increase over the next few years, the rental option is a good choice. In addition, if the tenant likes the house, school district or neighborhood, the rental option removes the house from the market, allowing the tenant to save enough to buy it at the end of the lease.
Even if the potential buyer can afford the property, they may not want to commit to it immediately. For example, if the potential buyer is from another city, they may want to live in the new city before committing to the purchase. Or, he or she might still have their old property for sale before they can buy the new property.
Finally, the property may not be eligible for certain loans, including a VA loan, due to necessary repairs or upgrades. By renting first, the potential buyer can make these improvements in order to qualify for the loan later.
Why landlords make a rental option
A landlord can enter into a rental option because they have had trouble selling the home. The option can make the property more attractive to different types of potential buyers.
In addition, if a landlord plans to sell the house in a few years, the rental option allows the landlord to collect a premium higher than the current market for rent. The worst case is that the tenant does not buy the house; the owner puts it on the market to sell and keeps the extra funds paid above the standard monthly rent.
There may also be tax issues related to the outright sale of the property now instead of selling it later. The option, although not guaranteed to sell later, makes the owner more likely to have a buyer ready to go at the end of the option.
The tenant loses the extra money paid above the standard monthly rent if the option to buy the house is not exercised at the end of the lease.
Special considerations with rental options
The tenant’s insurance is generally required for the tenant’s personal effects. The tenant’s insurance protects against any loss of value of personal effects and furniture of the house. In addition, it is important that it is mandatory that the owner also has home insurance in case something happens during the term of the lease that could harm the value of the property, such as a fire or water damage. .
A possible valuation should be included in the rental option contract. In other words, at the end of the lease, the value of the house could have decreased. An appraisal provides a present value of the property before buying and selling.
It is important to calculate the exact amount payable to the owner at the end of the rental option. Remember that the owner withdraws the house from the market and renounces any gain in the market value of the house by concluding the rental option. The owner will want to receive adequate compensation for not being able to sell the house to another person who was ready to buy it.
For those considering a rental option or a rental option to buy, they should ideally have a lawyer familiar with rental option transactions to review the fine print to ensure that there is no surprise at the end of the lease.