Agents Can Assist Even in Non-Traditional Homeownership Transactions
Most Americans still achieve homeownership the traditional way: by saving up a downpayment, obtaining a mortgage, hiring an agent, and making an offer. In fact, just last year, a staggering 87% of buyers financed their home purchase. While some of the outlying homes likely went to those who can afford to pay entirely in cash, there’s a third path to homeownership that can benefit potential buyers. What’s more, these candidates could use a great real estate agent, too.
Renting to own is a process in which a renter can purchase a property after a set rental period. These agreements can be a prudent homeownership choice for those who may not meet the requirements of traditional home financing and just so happen to be rising in popularity. In June 2021, 25% of homebuyers surveyed by Spruce, an online real estate company, indicated interest in rent-to-own properties. In 2020, Divvy Homes, a startup that facilitates rent-to-own purchases, also financed five times its usual number of home sales.
Despite this spike in popularity, agents should be aware of the practice’s murky history. Unfortunately, some unsavory investors and landlords have taken advantage of the appeal of rent-to-own properties. Criticism and lawsuits allege trapping minorities and low-income individuals in less-than-ideal rent-to-own situations, and scams and predatory practices still exist. Rent-to-own candidates will rely on your expertise as an agent, so you’ll want to have a thorough understanding of the process. When in doubt, you may also want to direct clients to a practicing real estate attorney, who can help ensure the deal is a judicious one.
With this information top of mind, let’s dig into rent-to-own properties and your role in the process.
Rent-to-Own Basics and the Agent’s Role
Rent-to-own agreements are typically one of two types: lease-option or lease-purchase. With a lease-option agreement, renters can decide whether or not they’d like to purchase the home at the end of the lease. They are by no means obligated to purchase and can walk away free if they so choose. Lease-purchase agreements, on the other hand, require the renter to complete the purchase. Lease-purchase agreements are far less flexible and can spell trouble for buyers who may not be able to secure financing after the rental period. If you or your client are less than certain that the contract falls in one camp or another, consult with a qualified attorney before advising them to sign anything.
The contract should also include details on the purchase price, specifically when and how it will be calculated. It may be determined when the lease is signed, the date that the lease expires, or some time in between. As market fluctuation can make a big difference if the calculation will take place at a later date, you’ll want to confer with your client on just what could change between the date the lease is signed and when they’ll be responsible for completing the purchase.
In rent-to-own situations, the eventual buyer typically pays a one-time option fee to ensure they’ll have the opportunity to purchase the property at a future date. When it comes to the fee amount, there is no industry standard. The contract may offer some insight, but negotiations may be possible. Typically, the fee will fall between 1-5% of the total purchase price. Clients should be advised of this extra up-front cost, particularly if they’re wary of the traditional homebuying process due to looming down payment requirements.
The client will also be paying rent until the lease expires, and they’ll need to consult their contract to determine if a portion of that monthly payment can be applied to the purchase price. In some rent-to-own agreements, a predetermined percentage is applied to the eventual purchase as a rent credit. You’ll want to ensure that your client is crystal clear on whether or not this benefit applies to them so as to avoid any surprises when the lease expires.
Clients should also confirm who is responsible for the property’s maintenance, homeowners insurance, taxes, fees, and other unexpected costs at each point of the process. Responsibilities may shift at some point. If so, ensure the client is aware of that date. If much of the responsibility, now or in the future, falls to your client, an appraisal may be in order.
If the client is planning to purchase the property, you’ll want to ensure they can obtain appropriate financing. As you would with traditional clients, point them in the direction of a lender you trust. If the client is opting into a lease-option agreement and decides not to purchase the property, or if they can’t finance the purchase, reiterate that they can walk away. They may lose their option fee and rent credit, but they will not be required to complete the home purchase process.
Rent-to-Own Success Stories
Enacting a rent-to-own agreement sets into motion a particular homebuying process that can work well for a unique demographic of homebuyers. For aspiring owners who don’t meet the credit criteria or have trouble saving up for a down payment, a rent-to-own agreement essentially provides a period to improve financial standing while reserving the client’s home of choice. For many, this program can make seemingly impossible dreams of homeownership a reality.
JB Harmon, an Atlanta-based sales engineer manager, was an aspiring homeowner with low credit. Harmon secured a rent-to-own agreement through Divvy and purchased a three-bed, two-bath home in 2019. He spent his rental period boosting his credit score until he qualified for a home loan from the Federal Housing Administration, a feat he feared impossible before his agent suggested the rent-to-own process. “Divvy allowed me to get the exact home I wanted at the correct time,” Harmon said.
Beverly Drewery, a Century 21 agent in Maryland, is certified with Home Partners of America (HPA), another lease-option provider that functions similarly to Divvy. “We’ve seen people who just don’t have the resources for the down payment, so we are seeing an increase in the number of [people interested] in [HPA’s] program,” said Drewery. Between 2019 and 2020 alone, she assisted more than 10 clients secure a home through HPA’s rent-to-own options.
While the process as a whole has some bad apples, renting to own can clear the path to homeownership for potential buyers who otherwise might never get there. A great agent can seriously streamline the process and make a difference for yet another demographic of buyers. Study up on the basics, do some research on the rent-to-own sellers operating in your market, and lend a helping hand to your local eventual renters-to-owners.
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