What is a Purchase Option?
A rent-to-own purchase, also known as a lease option, is a type of real estate transaction in which a tenant rents a property with the option to purchase it at a later date. One of the key elements of a rent-to-own agreement is the purchase price, which is the price that the tenant will pay to buy the property.
How is Purchase Price Calculated?
The purchase price for a rent-to-own property is typically calculated in one of two ways:
Fixing the Price at the Beginning of the Agreement
The first way in which the purchase price for a rent-to-own property is typically calculated is by setting the price at the beginning of the agreement and not changing it. This means that the tenant will pay the same price for the property, regardless of any changes in the real estate market.
It’s important to note that rent-to-own providers will typically add an appreciation rate to the purchase price of the home to offset potential increases in the market value. This option is beneficial for the tenant as they are able to lock in the purchase price of the property at the beginning of the agreement, and it provides them with a sense of stability in terms of their future home ownership costs. However, it may not be as beneficial for the landlord/seller, as they may miss out on the opportunity to increase the purchase price if the real estate market were to go up during the duration of the agreement.
Current Market Value of the Property
The second way in which the purchase price is typically calculated is based on the current market value of the property. This means that the tenant will pay the market value of the property at the time of purchase, which may be higher or lower than the original purchase price agreed upon. This option is more beneficial for the landlord/seller as it allows them to capitalize on any increases in the real estate market during the duration of the agreement. However, it may not be as beneficial for the tenant as they may end up paying more for the property than they initially agreed to or unable to buy the home if the price increases too much.
In both cases, the purchase price does not include fees or closing costs associated with the sale of the property. These may include real estate agent fees, title search fees, and other expenses that are typically incurred when buying a property. It’s important for the tenant to be aware of these additional costs, and to make sure they are included in the down payment, so they can budget accordingly.
It’s important to note that the tenant will usually have to pay an option consideration at the beginning of the rent-to-own agreement. This fee gives the tenant the right to purchase the property at a later date, and it is typically applied to the purchase price.
Price Breakdown
A rent-to-own purchase price is calculated by either fixing the price at the beginning of the agreement or base it on the current market value of the property. It’s important to have a complete understanding of how the purchase price is calculated before entering into a rent-to-own agreement and it is recommended to seek professional advice.
Here is an example of a rent-to-own purchase price breakdown:
- Original purchase price: $300,000
- Option Consideration: $5,000
- Rent: $1,500 per month
- Rent credit: $300 of rent paid each month
In this example, the tenant would pay $5,000 as an option consideration at the beginning of the agreement. This fee gives the tenant the right to purchase the property at a later date, and it is typically applied to the purchase price.
The tenant would also pay $1,500 per month in rent. In this example, $300 of the rent paid each month would be credited towards the purchase price.
After three years of paying rent, the tenant would have credited $15,800 towards the purchase price, and the property’s market value is now $320,000.
The mortgage amount in this scenario would be $304,200 ($300,000 original purchase price + $10,800 rent credit – $5,000 option consideration).
Final Takeaways
It’s important to note that this is just one example of a rent-to-own purchase price breakdown and terms can vary depending on the specific agreement. The rent credit percentage, option consideration, and market value of the property at the time of purchase can also vary.
It’s important for the tenant to carefully review and understand the terms of the agreement before entering into a rent-to-own agreement. It’s recommended to consult with a real estate attorney or financial advisor to ensure that the agreement is fair and reasonable.
Ready to navigate the Rent-to-Own purchase process? APPLY NOW
