How Rent to Own Works
Rent to own programs (also known as lease to own, rent to buy or lease to buy) are typically operated by professional entrepreneurs who seek to solve people’s problems for profit. They are not usually charities or not-for-profit societies, but they do include a philanthropic motive. CAROP urges potential clients to avoid programs where such a motive is not evident.
Rent to own programs help those who would like to enjoy the benefits of home ownership but are not yet in a position to qualify for a mortgage. It may be because of credit challenges from past mistakes, too short a work history to meet lender comfort levels, or inadequate savings to meet down payment requirements. Rent to own programs can be more flexible than the commercial lenders. They create programs to help such clients get into the homes they will eventually own prior to fixing these challenges. Then they assist the client (aka tenant-buyer) in fixing their issues over the course of the term, helping them to achieve mortgage eligibility within a prescribed period.
While there are varieties of rent to own programs, the central components are similar. An investor purchases a residential property for the purpose of renting it to a tenant who intends to eventually purchase it. For this privilege, the tenant-buyer pays a deposit, a portion of the amount eventually needed for the down payment. The client moves into the property as a renter. Usually, a portion of the rent charged during the period is applied to a “rent credit account.” A lease-option agreement is entered into by both parties that includes such matters as the amount of rent paid each month, any portion of rent that may be applied toward the rent credit account, the length of the term over which the tenant-buyer will have the option to purchase the property, and the purchase price at the end of the term. CAROP urges potential clients to avoid programs that do not have legally designed, written contracts.
During the term of the agreement, the program and the client work together to help shore up the issues that have prevented the client from obtaining a mortgage. The term of the agreement itself helps those who simply need a longer work history or to pay off other debts; the rent credit account is a forced savings program for those who need to increase their available funds for a down payment; and a credit coaching component (required of all CAROP members) assists the client in becoming credit-worthy by the end of the term.
At the end of the term, all outstanding issues now repaired, the tenant-buyer exercises the option to purchase the home. The original deposit and the rent credit account are assigned to the tenant-buyer for the down payment and closing costs, a mortgage is obtained, and the title to the home is transferred to the client.
If, however, the tenant-buyer is unwilling or unable to exercise the option at the end of the term, then they must vacate the premises and forfeit the original deposit and rent credit account. CAROP members seek to avoid such a situation by carefully screening clients at the outset, by designing programs that are win-win for all (i.e., it is financially better for the program to have the deal complete successfully than to have to accept forfeiture of funds), and by monitoring and encouraging clients throughout the lease-option period.