So you’re looking into possible options of how to live in New York City.
Let me guess, buying a home right now is just too expensive and your credit isn’t good enough to secure a mortgage.
On the other hand, you’re tired of the seemingly everlasting payments and restrictions that come with renting a home, and would prefer something more permanent, secure, and…YOURS.
Let’s not even bring up how expensive New York housing can be for both renters and buyers.
There may be a way to eat your cake and have it too. But keep in mind that this option may not necessarily be for you.
Don’t worry, we’ll get to that later but for now, let me introduce you to rent-to-own homes.
You have probably heard of rent-to-own homes already. They’ve become more popular recently thanks to the pandemic.
But if you’re looking for a guide to give you the full gist and help you determine if this is the right option for you, look no further.
Here’s all you need to know about rent-to-own homes in New York.
What Is a Rent-To-Own Agreement?
A rent-to-own agreement is exactly what it sounds like. It is an agreement to rent a property for a given period with the hope or plan to buy that property at the end of the period.
Rent-to-own agreements are not exclusive to housing or real estate but we’ll only focus on rent-to-own homes.
Rent-to-own homes allow a buyer to save up for a down payment on a home while living in the home and paying rent.
There are no fixed terms when it comes to this kind of arrangement. It all comes down to the specific contract you sign with the homeowner.
Types of Rent-to-own Agreements
An important decision to consider is what kind of Rent-to-own agreement you’re willing to make. There are two types- Lease option and lease purchase.
A lease option agreement gives you the option to either buy the property at the end of the rental period or walk away.
You are not obligated to buy the home, but you do forfeit any payments you already made.
- If you find a better deal at the end of the rental period, you are free to explore that option instead.
- You get to sample the home, its facilities, and the neighborhood before making a choice.
- If for reasons beyond your control, you still cannot afford to pay for the home, you can walk away without further penalties or even lawsuits.
- If you end up not buying the home, the arrangement ends up being no different than a regular rental arrangement. But it would have been way more expensive.
- You could go back to square one but with even less money to bargain with.
A lease purchase agreement also allows you to rent the home for the agreed period, but you are obligated to buy the property after.
- It is a reasonable deal to make if you are very sure you want the home and will be able to pay for it by the end of the rental period.
- Committing to this kind of arrangement can provide that extra motivation to make more money or maintain good credit so you can buy the home at the end of the rental period.
- If for some reason you cannot afford the purchase price by the end of the rental period, you will face serious penalties and possible legal actions against you.
- The purchase price of the home will be pre-determined before the end of the rental period. This means that you have to buy the property regardless of the state of the real estate market. If the real estate market is experiencing a decrease in value, which usually favors buyers, you won’t be able to take advantage of such a situation.
How Rent-To-Own Homes Work in New York
Rent-to-own homes work the same way pretty much everywhere in the United States, New York inclusive.
If you find a property you’re interested in renting to own, here’s what to do:
1. Determine the type of rent-to-own agreement you’re best suited for.
This will set the tone for the rest of the contract you will sign. Most people tend to go for the lease options agreement because if you’re so confident that you can afford to buy the home after the rental period, you might as well skip the rental period.
Still, if you don’t mind the lease purchase agreements, it would be advisable to investigate the homeowner, inspect the property, and run the contract by a real estate agent or attorney.
2. Agree on the terms of the contract.
Some major terms that make up the contract are option fees, purchase price, and rental period.
An option fee is the payment you make that gives you the option to buy the home. It is an upfront, one-time payment that is non-refundable.
Not all homeowners will require that you pay an option fee but if they do, the price is often negotiable (between 1 to 5% of the purchase price).
In some cases, the option fee may be removed from the purchase price if you decide to buy the home.
Rent and Rental Period:
The rent on rent-to-own homes is usually a bit higher than the average rate in the area, to compensate for possible rent credit. Rent credit is a percentage of the rent that makes up part of the purchase price.
For example, let’s say the agreed purchase price of the home is $500,000 and you pay a monthly rent of $2500 for 4 years (assuming no option fee). That would make the total rent paid $120,000 ($2500 x 4 x 12).
If your contract allows for rental credit at say 50%, then 50% of the $120,000 (which is $60,000) would count as part of the purchase price. By the end of the rental period, you would only need to pay $440,000 ($500,000 – $60,000).
The rental period would depend on how long it would take you to get a mortgage or raise the money, and how long the homeowner is willing to wait.
The purchase price is the amount you pay for the home after the rental period is up. The whole point of a rent-to-own home arrangement is to give you enough time to come up with the purchase price of the property.
In most cases, the purchase price is fixed at the beginning of the contract. The purchase price is usually higher than its current market value. This is because homeowners try to account for possible future increases in value.
In some other cases, the purchase price is determined at the end of the rental period.
The price would then be based on its current market value at that time. This can benefit either buyer or seller depending on the state of the real estate market.
3. Determine who is responsible for utilities and property maintenance.
In regular rental agreements, the homeowner usually maintains the property, covers repairs, and sometimes pays for utilities.
In a rent-to-own contract, the homeowner can transfer those responsibilities, even though they still own the home.
The contract might leave most of the maintenance responsibility on the renter since the plan is for them to eventually buy the property.
It is important to properly define which responsibilities fall on the buyer and which fall on the seller and have them clearly stated in the contract.
Either way, it is advisable to get renter’s insurance if you might not buy the property in the end. Also, check if the property tax payments are up-to-date before agreeing to the contract.
Benefits of Rent-to-own Homes
- You get to own your own home at the end of the deal, which is the whole point.
- If there’s a property you want but cannot afford at the time you find it, a rent-to-own deal prevents other interested buyers from buying the property while you sort out your finances.
- It is a good option for buyers with bad credit as they can work on their credit scores in the meantime.
- Depending on the contract signed and the real estate market, buyers could benefit from a purchase price fixed at the start of the contract. If the general prices of housing increase significantly within the rental period, the buyer will not be affected. This is a way of building equity without owning the home yet.
- You get to save the cost of moving from home to home.
- Depending on the contract, the homeowner might still bear the cost of maintenance.
- If you enter a lease options agreement, you get to sample the home without committing to buying it. There are some issues that you can only discover from living in a home long enough. After sampling the home and its surroundings, you get to weigh the pros and cons of buying or leaving more effectively.
- Owning a home is not for everyone. If your contract puts some of the property maintenance responsibility on you without the obligation of buying, you can test run being a homeowner. At the end of the rental period, you may discover that renting apartments is just a better fit for you.
The Downsides of Rent-to-own Homes
- Things might not go according to plan.
Even if you have every intention to buy the home at the end of the rental period, it just might not happen. You can’t say for sure what will happen in the next few months or years.
As opposed to buying a home immediately, and being sure where you stand, you are kind of left in limbo during the rental period.
- Although building equity is a possible benefit of rent-to-own homes, you do not own the equity until you pay the purchase price. If circumstances beyond your control emerge and you cannot afford to pay the purchase price, you do not benefit from the equity you thought you built.
- If you end up not buying the home, you lose all the money you spent already. Asides from option fees and rent credit allowance, you might spend on real estate agents, cost of inspections, and maintenance costs.
- The homeowner can lose the home.
This can be one of the worst possible scenarios in a rent-to-own deal. The homeowner can face financial difficulty and lose the home due to foreclosure. Before signing a contract, ask about the mortgage history and balance.
This may not be an accurate tell of whether the homeowner will finish making payments but at least you can weigh your options better and seek expert advice.
- Depending on your contract, you may not have full control over the property while you live there (since it is not yours yet). For instance, the homeowner might not want you to make any major changes to the property.
Other Costs associated with Rent-to-own Homes
Closing Costs: Closing costs are any additional taxes or payments you make when completing any real estate transaction. In New York City, these costs range from 1.5 – 6% of the sales price for buyers and 8 – 10% for sellers.
Cost of an attorney: It is advisable to get a real estate attorney to examine the fine prints of your rent-to-own contracts and advise you at different points of the arrangement.
Attorney fees can go up to $5000 because of how complicated rent-to-own arrangements can be.
Finding Rent-to-own Homes in New York City
If you’ve gone through all the information and you feel rent-to-own homes could be a great option for you, then it’s time to start looking. Thankfully, you can find rent-to-own deals all over NYC boroughs.
I would advise you to first start online. You’ll get a good idea of the deals you’re likely to find.
Here are some websites you can check:
If you like what you see, you can go ahead to consult real estate agents. Alternatively, if you’re physically checking neighborhoods you’re interested in, and you see a property you like for sale, you can contact the seller directly to see if they offer rent-to-own deals.