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Rent-To-Own: What It Is And How It Works In NYC?

BRETT ARI FISCHER
THE NEW YORK CITY BROKER

What Is Rent-To-Own?

Rent-to-own or rent-to-buy is a method of buying a home and a part of your rent (or the whole rent) goes towards the purchase of the home you are renting. Rent-to-own programs are offered by building owners and builders (for new constructions) to attract more buyers, especially in a buyer’s market. These programs gained a lot of momentum during the pandemic when COVID initially slowed down the real estate market.

These programs are not standardized, and each building (that offers a rent-to-own program) may have its own terms and conditions.

A Few Things Buyers Need To Understand About Rent-To-Own Programs

  • Rent-to-own programs are not long-term. They usually last for one to three years.
  • The programs may differ from building to building, so it’s important to understand the terms and conditions of each program.
  • Depending on your rent-to-own contract, you may be obligated to buy the apartment when your rental lease is up.
  • Since a portion of your rent is usually applied toward the price of the property, the rent is higher than normal.
  • Rent-to-own contracts are complex and require more paperwork, which results in more documentation costs.
  • These programs allow you to move in and get a feel of the property you like even if you are unable to afford it right away.
  • It’s also ideal for those who are also working towards building/improving their credit score to get the right mortgage rate. They may start paying towards an apartment one or two years before they can secure the right mortgage to buy it.
  • There may be more co-op apartments available for rent-to-own than condos.

Is Rent-To-Own A Good Option For You In NYC?

A rent-to-own apartment can be a great option for some buyers, but not all. For many old, difficult-to-sell apartments, it’s a tactic employed by owners to attract buyers in an unfavorable market. In new constructions (especially luxury apartments), it’s a way to allow the right buyers to test the apartment before fully committing themselves to buying it.

Rent-to-own can be a good option for buyers who are ready to make a move from renting to buying but can’t make a move just yet. If you need more time to save up for closing costs, don’t have enough money for a down payment yet, or you need to build your credit to secure a decent mortgage, rent-to-own can be a powerful strategy for you.    

There are some challenges associated with rent-to-own apartments as well. For example, if you have committed to buy the apartment when the rental lease ends but your financial situation changes in the meanwhile, you might not get the money that you paid in rent (toward the purchase price) back.

A lender’s treatment of the money you have paid towards the purchase price can also make a lot of difference. The lender should treat it as credit that would apply toward your sale, rather than a concession in property price that can lower the amount the bank will lend you for the apartment.

Two Rent-To-Own Contract Types

The lease option contract and lease purchase contract are two rent-to-own contracts you should know about.

Lease Option Contract gives you, the tenant, the option to buy the apartment once your rental lease ends at the fair market value of the apartment at the time of signing the lease. If you decide to buy, you may have the choice to divert the amount you have paid towards the purchase of the apartment (the premium over rent) can go towards down payment or closing costs.

But if you don’t buy the apartment, the owner gets to keep all the rent and the premium you have paid over the fair rent. But it still gives you a level of control.

Lease-Purchase Contract, on the other hand, doesn’t give you a way out. If you enter into this rent-to-own contract, you are obligated to buy the apartment at a mutually decided-upon price. It may be an actual dollar value, the current market value of the apartment, or the value at the time of signing the deal.

The good part about such a contract is that if the contract allows it, all of your rental payments can be counted towards the purchase price. But that’s a binding contract, and if you are not a hundred percent sure about the apartment, you should not execute this contract.