Should you remodel a rent to own home?

A rent to own home can give you a chance to achieve home ownership without having to meet the stringent guidelines set forth by banks and lending institutions. Many people are finding it difficult to sell their properties in the lagging economy and entering into a rent to own contract can be a way for them to get their properties sold. One question that may come up as you look at homes might be if it is a good idea to remodel a home that you are renting with the option to own? Purchasing a fixer-upper can save you money but what about the costs of remodeling? Should they be covered by you or your landlord? All of these factors need to be considered before you decide to take out your hammer and nails and do the job yourself or hire a contractor.

Typical costs for remodeling

Costs may vary depending on the area you live in and the materials used but a general idea of how much updates will cost you is good to know so that you can make an informed decision.

  • Kitchens: This can be one of the most expensive rooms to remodel next to the bathroom. Depending on if you only do a cosmetic update or replace the cabinets, countertops and appliances a kitchen remodel can cost between $5,000 to $30,000 or more.
  • Bathrooms: A bathroom remodel can be simple or complex. Replacing only the sink, fixtures and resurfacing the cabinets and tile can save you money. A complete remodel that includes flooring, tub and shower and new tile can be costly and time consuming. A bathroom remodel averages $5,000 and can run as high as $30,000.
  • Living/Great and Bedrooms Rooms: Sometimes you can just put a fresh coat of paint on the walls and give these rooms a whole new look. This is one of the cheapest ways to brighten up a room and give it a fresh feeling. Paint runs around $12 to $15 a can and you will only need a few gallons. If you also decide to replace the flooring the cost can run up to $60 a yard depending on the materials you use.

As with any home improvement project, the cost will be determined by the quality and grade of materials you use and whether you do it yourself or hire a contractor. If you decide to hire a contractor, be sure to get several estimates and verify that the contractor is licensed.

Who pays for the remodeling?

When you look at properties to rent to own, you should be clear about who will carry the cost of the work and materials. If you are considering a property that needs extensive work this should be considered as part of the total cost of the home. You can talk to the landlord and see if you can take the cost of the remodeling work off of your rent or purchase price of the home. Very few landlords will agree to pay for a remodeling job. They may consider this a cost that you must pay for and not want to give you a discount for improving the property.

This question is one that you need to have a clear answer to before you draw up your lease agreement. While you may not get every dollar back that you put into the remodeling, you may be able to get a large percentage of it applied to rent or purchase price if you and your landlord can come to an agreement. This agreement must be stipulated and clearly laid out in your rental or purchasing contract.

Protecting your investment

Keep in mind that if you have to move and cancel your lease contract you will lose the money and time you have invested in the home. Be aware of the terms of your contract regarding late payments, grace periods and late fees. Some rent to own contracts become null and void if you miss even one payment or are consistently late. Protect your investment and know your rights and be clear on the provisions laid out in the contract that you enter into with your landlord.

Conclusion

Renting a property to own that is a fixer-upper can be a rewarding experience. If you like to do remodeling and are willing to put forth some time and effort you can be rewarded with a home that is up to date and tailored to your tastes. Be sure you know up front who will bear the burden of the cost, whether it will be you or your landlord. Weigh the pros and cons of remodeling a home that is not yours and how much value it will add to the home once it is in your name. If you can work out a deal with your landlord and stick to it, then remodeling a rent to own home may be a good idea.

Rent to own contracts

These days getting approved for a home loan of any type is very difficult. The banks, reacting to the economic crisis are heavily regulated. The required credit score, to qualify for a home loan and higher than ever down payments are keeping many potential homeowners literally out in the cold. The problem is a serious one for many families. In addition to not being able to get a loan now, with the economy improving, housing values will rise, adding many thousands to the final price of the house and depriving them of collecting the appreciation.

Rental contract

Instead of buying outright many people are electing to enter into rent to own agreements with home sellers. These agreements are generally outlined in rent to own contracts. A rent to own contract is actually two contracts. The first contract is the rental agreement between the landlord and tenant. This contract includes the monthly rent amount and the day it is due along with any information about late charges or maintenance required. It also includes the life span of the lease and this is usually the time needed for the buyer to obtain a loan or otherwise come up with the purchase price. These agreements last for usually three years maximum but the date is as flexible as the two parties agree on. While it is rare some owners will even agree to rent to own for the entire amount.

Rent to own contract

The second contract is the lease purchase agreement. This document is much more important than the first document. While much of the same information is included, such as the monthly payment amount, end of the lease period, and late payment agreements it also contains much more. This is a situation in which both the buyer and seller need protection. The lease purchase agreement should have all of each party’s rights outlined clearly. The following is a short list of issues that should be addressed in a lease purchase agreement.

  1. Total purchase prices of the house
  2. Amount of money due each month that is applied to the above price
  3. Due dates of all payments, including the final due date of the total
  4. Maintenance and remodeling issues
  5. Default/breach consequences for both the buyer and seller

If you have a lease rental period that is three years or longer you should understand that there are a great many things that can happen in that time. The values of homes could increase substantially and the home owner may decide that they do not want to wait. In a situation like this, if not protected by the lease purchase agreement, the buyer could lose all of their investment. The same applies to the buyer who finds a home that they like better, for a better price, and elects to opt out. The entire period that the seller has held the home off the market in expectation of this purchase is lost.

Provisions of a rent to own contract

Another potential problem area is remodeling and maintenance. The lease purchase agreement should describe who is responsible for maintenance. This is sometimes a large problem. In most tenant agreements the property owner is responsible for maintenance. Because this is a situation in which each month the renter is increasing his interest in the property it can be confusing if the details are not outlined in full. This is also the case with remodeling. While most property owners will not have a problem with this, thinking that if the work is done and the family defaults, they will benefit from the appreciation from the remodeling. Depending on the amount of work to be done remodeling can increase the value of the house tens of thousands of dollars.

Another issue that can be resolved in a lease purchase contract is the addition of equipment. Alternative energy sources all require the installation of special equipment. Solar cells, wind generators, things like this are examples. Much of this equipment is very expensive. If either the buyer or the seller chooses to opt out of the contract, or they do so by mutual agreement, who keeps this equipment? Removing it can decrease the value of the property and letting it stay will cheat the buyer out of their investment. It will not be too many years before alternative energy on homes is more common than not and this will become a major issue in most real estate transactions.

Conclusion

A rent to own contract can be nearly anything that the parties want it to be. It can include any type of conditions that are not forbidden by law and should be designed to protect the buyer and seller equally. The best way to assure that it is done with all parties in mind is to either have a licensed real estate attorney prepare it for you or have one review it completely before you sign it.

Financing options for rent to own homes

If you are trying to purchase a home you may find that it is not possible to obtain a mortgage from a bank for various reasons including your credit history, credit score or employment history. Banks have very strict criteria that you must meet before they will approve a home loan. You may not qualify for a loan from a bank or the interest they want to charge you may be more than you are willing to pay then the option to rent to own may be a good choice for you. Normally you enter into a contract with the landlord and after a set amount of rent is paid the home is yours. While these contracts are pretty basic there are some options for you to consider before putting your name on the dotted line.

Rent to own or mortgage?

There is an advantage to taking out a mortgage for your home. You will usually end up paying less for your home by taking out a mortgage from a bank depending on the interest rate that is set. For example, if you purchase a $300,000 home by financing it through a bank your may pay approximately $145,000 less than if you rent the same home for 30 years. This is because rent normally increases as time goes by and your loan payment stays the same.

Bank or private Loan?

You may have the option to rent the property for a specified time and then make a balloon payment for the rest of the purchase price. If this is the contract you choose you will need to find financing for the balloon payment. You may be able to rectify the circumstances that prevented you from getting approval from a bank by the time the balloon payment is due. If this is the case then a bank loan for a mortgage will have the best interest rate available at the time.

Your landlord may enter into an agreement with you to finance the remainder of the purchase price for your home. He would become the lending institution and it would be wise to hire a lawyer to set up this agreement for your protection. You would make your payments to him and after the allotted time you would own the home and hold the title. These types of agreements are normally for much shorter times than a traditional mortgage.

Remember that while you have a loan outstanding for your home you do not hold the title. The lending institution or landlord will hold the title until the home is completely paid for. This means that if you decide to move before you are through paying for the property you may forfeit all of the money you have paid up to that point if you are renting to own. You must be sure that your budget is adequate to enter into such a loan or contract so that you do not lose your investment.

The most common way to finance a rent to own home is for your rent payments to go toward the purchase price of the home. Generally these agreements are for as short as 3 years or longer depending on your situation. A contract is still required for this type of agreement stating exactly how much the house costs, what amount of your rent will go toward the purchase and the duration of the terms.

Down payments

Any money that you can put down toward the purchase price of your home will decrease the length of the contract that is required before you can take possession of the property. Even a small deposit payment is better than nothing. Your contract should state clearly whether your down payment is refundable or forfeited should you choose to terminate your agreement for purchase.

Interest

This is a fixed rate that is added onto your loan every month for the duration of your loan. Some landlords may give you a break if you can pay off your loan before the last payment is due. Depending on the contract you enter with your landlord and if it is considered a loan you may or may not accrue interest.  Normally you can expect a 1% to 5% interest rate on a loan held by your landlord.

Buyer protection

If you choose to have your landlord carry the financing you should hire a real estate lawyer to draw up the contract. This will protect your interests and make sure that you are protected. If you enter into a rent to own contract without a lawyer’s advice you are putting yourself at risk of not having any legal recourse should the deal sour.

Conclusion

Examine your budget and credit. If you find it is in your best interest to rent to own a home then know your options and your legal rights.