The property rental market in the Bitterroot valley and Missoula is seeing an upswing in the availability and popularity of rent-to-own options. This is due to several factors. Demand, first and foremost, is pushing the market this direction. Tightening lending standards that disqualify would-be homebuyers from getting a loan is a factor. Potential homebuyers that have marred credit or depleted savings also find these options attractive.
Rent-to-own options, for a buyer, are a way for a person with poor credit or a lack of savings to work toward owning a home. For a seller, this option opens up possibilities of selling to a separate market, with an increasing pool of potential buyers.
The setup of these options usually includes the following: First, the buyer and seller agree on a time period, monthly payment, and sale price. The sale price of the home is set when drawing up the contract and typically cannot be changed. The payment is split into two parts: the monthly rent, which goes to the homeowner, and the down payment amount, which goes to an escrow account. This money accumulates over the life of the lease to be used as a down payment when the renter exercises the option to buy. There is a set time period agreed upon by both parties for which the option to buy must be executed, or the contract is void and the homeowner keeps the escrow funds.
The seller enjoys the benefit of knowing that either they will sell the property in the time that is agreed upon contractually, or they will collect the accumulated payments in escrow. In most contracts, the tenants are also responsible for maintenance, which is another burden removed from the homeowner. The other perk is, if the value of the property depreciates, the sales price is already established, insulating the seller from the market downturn. The flip side, of course, is if the property value rises, the homeowner loses money at the execution of a sale.
The buyer enjoys the benefit of working towards home ownership that otherwise might not be possible. The seller is able to pay down the final sale amount. A renter with poor credit can also work on building a better credit history through the process. And the renter stands to gain if the property appreciates during his or her tenancy when they exercise the right to buy.
While the basic premise of rent-to-own contracts is simple and straightforward, there are many different types of agreements that vary in favorability to the seller and the buyer. One such agreement that is gaining traction among buyers and real estate agents is the right of first refusal. In this agreement, the structure is much the same as outlined above, but the home continues to be listed for sale. If a potential buyer comes along and puts down an offer on the house before the tenant exercises his or her right to buy, the seller can present the offer to the tenant, at which point the tenant must match the offer and proceed towards closing, or he or she will lose the option to buy. This option greatly benefits the homeowner, as the property remains for sale and could sell earlier. This also insulates the homeowner from losing money through property appreciation and being forced into accepting the established sale price with the tenant. The tenant in this arrangement can lose big if another buyer comes along, and loses the stability and peace of mind of feeling like he or she is working towards a purchase.
Rent-to-own options are becoming increasingly popular for a reason, but it is important that each potential buyer and seller weigh the pros and cons. Anyone interested or considering these options should enlist the help of an attorney to make sure they are protected and are not agreeing to something potentially risky.
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