So many new terms, where to start?
Well I guess we'll start here with Option Consideration!
In my first post, What to do when the bank rejects your mortgage application, I mentioned Rent to Own as an alternative solution to getting a mortgage from the bank. I also referenced something called an Option Consideration which is one small part of the rent to own process, and I promised to explain what that was in another post. So here we are. But First... (in a Julie Chen voice, any Big Brother fans??)
It would help if first I explained to you what we mean by Option. And in the case of rent to own, we are specifically talking about an Option to Purchase.
Option to Purchase
An option to purchase is a legal agreement that grants the tenant an option (or a right) to buy the rental property within a pre-determined period for a pre-determined price.
Get it?
It gives you with the option to buy the home so that no one else can swoop in and buy it from underneath you.
You simply need to exercise that right before the end of the term in order to retain that right.
That said, you need to follow that ever so important plan that I mentioned in my last post to ensure you are in a position to be able to purchase the home at the end of the term as well.
Alright. Now that that's out of the way.. Let's get back to the Option Consideration.
Option Consideration?
If you've done any research on rent to own before, you may have also seen the terms Option Fee or Option Money. These terms are used interchangeably but they all mean the same thing. So what the heck is it? It's a fee that you as the tenant buyer pays that provides you with the option to purchase the home at a later date. A portion of this fee is usually charged upfront, similar to a down payment. The other portion is paid monthly in addition to the rent.
Some companies may choose to have you pay the entire fee upfront; Others might have you pay nothing upfront and only make monthly payments.
I will describe both. Upfront Fee Depending on the rent to own company, the upfront fee typically ranges between 3.5-5% of the purchase price of the property. Some companies may provide options for 0% down, however I caution against these for reasons that I'll outline in another post. But this "fee" isn't just an additional fee that you pay that goes into the pockets of the rent to own company. Instead, it acts as a forced savings account.
Both the upfront and monthly fees collected go toward your down payment at the end of the rent to own term. Monthly Fee As mentioned, the monthly fee portion is paid monthly in addition to the rent. The amount of the monthly fee varies depending on the amount of down payment that you brought initially, and the amount of down payment that you will need to have at the end of the term in order to take ownership. This should be clearly stated in your Option to Purchase agreement so there is absolutely no confusion. Again, and I will reiterate often, the legal documents that form the rent to own agreement are to protect both you AND the rent to own company. It's also super important that you are given the chance to review the legal documents with your own lawyer to ensure you aren't being taken advantage of. Okay now that that is out of the way… back to the Option Consideration. In Summary It's really just a fancy term that describes monies paid in exchange for the right to purchase the property at a later date. That's it! But it's an essential component to any rent to own program. Leave a comment if you have a question about Option Consideration or anything else related to rent to own. Or just let me know if you found some value in this post. Thanks for reading & Happy House Hunting! Victoria
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