Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.
If you’ve ever considered buying or selling a home using a rent-to-own agreement or programs in NYC, read our guide. You will learn everything you’ll need to know. Rent-to-own homes and apartments remain relatively rare in NYC. This is due to co-ops and banks having strict financial requirements around debt-to-income ratios and post-closing liquidity. However, this format provides a tenant with a high-income level with a goal to saving enough for down payment, closing costs, and post-closing liquidity.
Although uncommon, a rent-to-own agreement is one way to buy or sell a home in New York City. This model allows prospective buyers to enter into a rental agreement or lease with a property owner for a specified lease term. This term is typically anywhere from one to three years. At the end of the lease, the renter has either an option or an obligation to purchase the unit. This depends on the deal’s terms. Buying or selling your home using a rent-to-own model is typically arranged in one of two ways and with an important distinction.
These transactions are more complex than regular sales. They entail multiple contracts instead of just one. You’ll need a rental agreement, a purchase contract, and an option/obligation to buy contract.
There are two types of rent-to-own models. The most significant distinction being the renter’s obligation vs. the option to purchase at the end of the lease term.
When a buyer enters into a lease-purchase agreement, they have agreed to purchase the property at the end of the lease. Typically, the buyer and seller will have agreed upon a pre-determined price. This could be the fair market value at the end of the lease term plus some agreed-upon premium. It is similar in length and complexity to a regular purchase and sale contract in New York.
The seller can credit some, none, or even all of the rent payments towards the buyer’s down payment. At the end of the lease agreement, the tenant must buy the apartment at a pre-determined price. This price may be the market value of the apartment at the beginning of the lease term. Or the price could be based on some other metric, such as an appraisal.
The lease option contract offers the buyer a more flexible option. The distinction between the two agreements is simple. With a lease option contract, the renter is not obligated to go through with purchasing the unit at the end of the lease term; the renter may choose whether they wish to proceed with the sale or drop. With this agreement, the renter will put up a premium for their option. The owner can keep at the end of the lease if the renter chooses to waive its option to purchase.
This model is attractive for owners and prospective buyers because the parties may incorporate a “rent premium.” This rent premium will allow owners to collect above-market rents. A percentage of the extra money may be put towards closing costs or a down payment if the renter exercises their option.
If the tenant waives the right to buy, then the lease option contract expires, and the owner keeps all the rental income plus the option premium.
Some aspects of the rent-to-own model in NYC are attractive to particular buyers for several reasons. If you’re on the market for a new home but don’t have enough liquid cash for a down payment, this represents a great option. Paying the rent premium for three years is a practical way to save for a down payment while you settle into your new home.
Buyers may also consider the rent-to-own option when they’re ready to commit to buying a home but don’t qualify for financing. The lease term gives the tenant time to come up with a down payment. It will allow the buyer to improve their debt to income to get qualify for financing.
However, it’s essential to keep in mind that if the buyer decides not to go through purchasing the unit at the end of the lease term, the owner will walk away with the extra cash.
Rent to own can make sense for sellers of condos, houses, pied-a-terre, or even co-ops with lenient coop financial requirements if they can’t find anyone else to sell to. It makes sense if this is the only deal on the table, and they aren’t in a rush to sell.
The seller benefits from the ability to earn higher than market rate rent plus potentially. On top of it, their seller owns an option premium and can keep the cash if the tenant doesn’t exercise the buy option or defaults on the purchase contract.
In other words, the seller will get paid above market for renting their apartment. This remains true even if the tenant doesn’t purchase the property at the end of the lease term.
The rent-to-own home model isn’t always a seller’s best option. A seller should critically assess their situation. He should consider offering a rent-to-own option to prospective buyers if they cannot attract other offers. For sellers, negotiating a rent premium could put extra money in their pockets each month since they get paid above-market rent for the unit.
There is another glaring reason the rent-to-own apartment model isn’t always attractive for sellers. The buyers who wish to enter into these kinds of agreements are almost always financially unqualified as a home buyer. Specifically, these buyers are either not qualified for financing or can’t come up with a down payment. Those are certain factors that a seller should keep in mind when considering selling their property through a rent-to-own agreement.
Both buyers and sellers should also note that these transactions are much more complex than traditional real estate deals and are sure to rack up a substantial amount of legal fees in negotiations, contract drafting, and closing costs.
Disclaimer: The material and information contained in this article are for informational purposes only. You should not rely on the material or information for making business, legal, tax, or any other decisions.