What is Rent-to-Own?
Vendor finance, also known as seller financing, is a financial arrangement where the seller of a product or service extends credit to the buyer to facilitate the purchase. Instead of the buyer obtaining financing from a traditional lender, like a bank, the vendor itself provides the loan or financing terms.
This type of financing is often used in business transactions, such as real estate, sale of equipment, or even entire companies.
The Rent-to-Own strategy offers a practical solution for gradually saving up a deposit whilst locking in the purchase price, as long as you are in the Agreement period and you adhere to the terms and conditions. In real estate terms, Rent-to-Own is an agreement where a tenant rents a property with an option to buy at a future date when the lease expires.
The Agreement.
A rent-to-own agreement is actually two contracts… there's a tenancy agreement, and an Option to Purchase agreement. At the beginning of the lease, an agreed-upon term is established, at the end of which the option to purchase the home is given to the tenant.
The amount of rent is typically higher than the market rent, as a portion of the rent is used to go towards building the deposit towards the purchase of the home at the end of the lease term. The "extra rent" is usually 20-40% more. For example, a normal rent of $500 per week might be $700 per week in a Rent-to-Own deal, with the extra $200 going towards the deposit that is being gradually accumulated.
At the end of the lease term, there is a time called the 'option period', where the tenant can purchase the home by taking a home loan out with a bank or a typical lender.
Here's the big risk: If the tenant is unable to purchase the home at this time, they lose all contributions and equity established and it is essential that before you sign on for a rent-to-buy scheme, you are confident you will be able to both make the higher rental payments and be able to purchase the property at the end of the lease.