Why Did The RTO Model Become Very Popular During The Pandemic?

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The onset of the pandemic has dealt a severe blow to the housing market, as prices have surged and supplies have dwindled. Amidst the options available, a lesser-known alternative has surfaced: the Rent-to-Own Scheme.

This allows people to rent a home for some time and then purchase the house at a price. As a result, those who can’t make a big down payment can now invest in a home of their choice, while homeowners can sell their homes for a fair price.

How COVID-19 Affected the Market

As a result of COVID-19, many potential buyers lost the ability to purchase what would’ve been their first homes, due to the following:

  • Unemployment
  • Layoffs
  • Underemployment

Unfortunately, instead of being able to save for down payments, they’ve had to delay such plans. Others had to withdraw money from their savings just to pay monthly bills.

Moreover, there weren’t many starter homes to choose from — by the third quarter of 2020, the prices for median single-family homes had risen by 12%, leaving many unable to purchase their dream home. 

Rent-to-Own Options Today

While rent-to-own is a concept left behind during the 1980s and 1990s, it resurfaced when mortgage rates climbed up to 18%, along with the rapid decline of home sales.

As such, rent-own options appeared around Miami and New York. However, in Manhattan, the pandemic has shaken the once stable real estate market, making buyers more hesitant to purchase condos at a time of uncertainty.

How Does it Work?

Rent-to-own is a kind of contract that generally provides renters the option to buy the property they are renting at the end of the lease period.

This contract is made up of 2 parts, which are the lease-period and the purchase-period. The first stage — the rental period — usually lasts between 1-3 years, where the renter can decide if they want to purchase the home or stop the contract.

What often happens is that a portion of the monthly rent will go towards the down payment of the house, should the renter decide to purchase the property.

However, should they decide against buying the property, they will likely lose the deposit made at the beginning of the contract. In general, such agreements won’t include the purchase financing of the property.

If you do wish to buy, you will need to pay for the home in full, using a mortgage.

Keep in mind that buyers will need to pay a higher monthly rent, where the premium will be credited to the purchase price. Usually, the size of this premium will range from 15% to 25% of the rental price. Moreover, the renter will also need to pay an option fee once the contract is signed.

Advantages and Disadvantages

Through rent to own, those who are struggling through the pandemic who have too little income, marginal credit scores, and too much debt will be able to get more time to improve their financial condition.

Because of this, first-time buyers may be able to find a way to afford a home that’s more expensive through rent to own.

By providing a rent-to-own option, sellers will be able to attract buyers without having to lower their sale price.

It can also provide an attractive deal for investors who are looking for single-family rentals. Doing this will allow them to have a tenant lined up so they never need to worry about a vacant month while getting higher sales prices.

Unfortunately, a lease-to-own also has disadvantages — it makes no sense to consider this option for someone who can qualify for a mortgage on good terms, especially at today’s low rates.

Moreover, considering a rent-to-own option will need you to do thorough research because its history isn’t the best. Families who fail to perform their due diligence will find themselves in the middle of a scam, such as:

  • Ending up with unpaid property taxes that pop out once it’s too late
  • Sellers who aren’t the actual owners of the property
  • Sellers without insurance to cover for floods and fires
  • Properties with asbestos, lead, mold, and other safety or health issues
  • Sellers who go bankrupt before the property sells
  • Pending foreclosures and defaults that only show once it’s too late

As a result, those who wish to consider a rent-to-own option should understand their contract and should look for a real estate attorney to review it.

Find Your Rent-to-Own Property with Us

If you’re thinking about exploring a rent-to-own opportunity, be sure to look through our website where you can find the perfect home for you.

Simply enter the ZIP code where you wish to transfer and click on the house you wish to see or look through all the rentals in the same neighborhood. Get started with us today, and see how we can help you choose your next home.

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