September 20

RTO Quickstart

Before beginning the Rent-to-Own process, it is important to know if RTO is right for you! Find out here.

If RTO is right for you, how do you proceed? 

You follow the guide! 

Our Rent-to-Own Guide is a comprehensive step-by-step guide on how to accomplish any goal relating to RTO! In this guide, you will learn how typical RTO contracts work, how to protect yourself by using an RTO contract, and the ultimate goal, to secure your home by being ready to purchase it when the time comes.

Table of Contents

What is a Rent-to-Own?

First of all,what is a rent-to-own home?

When we say rent-to-own or RTO we are not talking about the kind of house you are looking for. This is simply the way to get into your home before buying it. Rent-to-own means you have worked with the owner and they have agreed to rent you their home for a certain amount of time and then you will purchase it by obtaining financing or having saved up enough cash.

Here’s a story about a customer of ours named Joy.

Joy had a few young kids and wanted to move out of an apartment and into a house. She could afford the monthly payment but her credit scores were too low to get a mortgage and she didn’t have a bunch of cash for a down payment. She decided to look for an RTO. This would make it so she could move in right away and start enjoying the home and neighborhood she would eventually buy and live in. During her rental period, part of her monthly payment went toward her down payment and she worked with us to repair and build her credit.

A few years later when Joy’s rental period came up she had a down payment ready and her credit was in excellent shape, so she was approved for her mortgage. This is the story of how Joy bought her home and started building wealth for her family using RTO.

Before moving forward it’s important to make sure you know if RTO is rightfor you. Typically a person looking to get into a home would choose an Rent-to-Ownfor its numerous upfront benefits, for example, once you’ve done the workto find a house and get a contract you can move in right away, if you don’thave a down payment you can arrange to make portions of it in yourmonthly rent or save up for it in your rental period, if you don’t have thecredit scores to qualify you can still get into the home you want to live inright away while you work on qualifying instead of working on qualifyingthen getting into the home.Because there are many ways to obtain and eventually own your dreamhome we will briefly discuss other common instruments used to get into ahouse.

Lease to Purchase. A lease to purchase is a lease or rent agreement and anagreement that gives you an option to buy the house.

Because a Rent-to-Own contract can come in many forms some RTOs and Lease toPurchase agreements are identical.

Typically when someone refers to a rent-to-own deal they are talking about a rent agreement and an option to buy just like a lease-to-purchase, but rent-to-own also infers that you pay a higher rent because a portion of it is going toward your down payment. A ‘Cash Offer’ means you pay for the full house with money up front and you don’t borrow anything from a bank or friend. Few people are in this position by the time they need housing.

A Mortgage is the ultimate goal. When you qualify for and get a mortgage, every monthly payment invests some money into the house called equity that belongs to you, pays your taxes and insurance to protect your property, and gets you one step closer to owning your dream home all while you are living in it and enjoying it.

Remember that the goal for both an RTO and lease-to-purchase is a mortgage.Now that we have identified that RTO is the best fit for you, let’s get to work on finding you the house you’d like to move into. This is really the only thing getting in the way of moving in as soon as tomorrow!

If you’re still not convinced that Rent-to-Own is right for you, view more information in our “Why RTO?” article. You can also take our free quiz that will give you a clear-cut answer to whether or not Rent-to-Own is right for you.

How to Find RTO Listings

Many of our customers come to us from websites offering to show them listings of local rent-to-own homes. These sites can be misleading. When you hear about RTO listings you are really just being referred to a regular listing which is a house that is for sale. This is good and bad news.

The good news is you can find these exact services online without paying any kind of fees or giving more personal information than you are comfortable with. The bad news is there aren’t resources to show you actual homes whose owners are already considering a rent-to-own deal so there is some leg work involved. 

Here’s what you need to know!

There are highly trusted websites that will show you legitimate listings in your area and the best ones don’t ever require a credit card number. Remember that most of these sites make money by helping real estate agents sell a house or find a house for their clients, so if they are trying to charge you money to simply look at houses for sale you just might begetting ripped off.

Some of our favorites are zillow.com and forsalebyowner.com but any site that allows you to message or speak directly to the seller or seller agent, and doesn’t require your personal information or payment is probably a good resource for you. Remember not to fall for sites offering you local RTO listings for monthly fees or in exchange for permission to call and text you.

These sites are simply showing you the houses regularly listed for sale that are available on places like Zillow.com and calling them RTO regardless of whether the seller is interested in an RTO deal or not. They will also then sell your information to many othercompanies that will be calling, texting and emailing you for weeks if not months.

For more information about Rent-to-Own listings and why they’re a scam, read through our “RTO Scams” article. 

Quick Tip! Skip the sites: take a drive through the neighborhood you are interested in finding a home in. Look for any for sale by owner signs. These people generally want to sell their house without an agent and are willing to talk to you to strike a deal!

So now that we have a great source for listings how do we convert these to potential RTO deals? All RTO contracts come from people trying to sell their current home and find a new one. There are many advantages for a seller to choose a rent-to-own option.

Here are just a few of the many reasons sellers look to RTO for their currenthome:

► If a home is listed for sale and no one has agreed to purchase price, aseller might want to rent it for a few years to allow the market to adjust intheir favor.► The seller is trying to move out quickly and can only qualify for their nexthome if they can show that their current home is rented out undercontract and the payment is covered.► The seller wants to keep the mortgage on their credit for a few moreyears to help their scores and credit profile.► The seller is interested in selling or renting out the house as an investmentproperty to make some money.► The seller would like to keep investing in the equity of the house and theyknow that every month you pay your rent is another chunk of cash thatthey will get back at the sale of their home.

How to Ask a Seller for an RTO

So how do YOU get started!

Your very first step is to identify a few houses that suit your family’s needsthat are currently for sale. Remember that houses that have been on the market the longest may be the houses whose sellers are most motivated to agree to an RTO.

We recommend finding 5 to 10 houses that might suit your needs (I mean if it takes finding 100 it’s worth getting into a home!) Next, you will need to message the seller’s agent or the owner of the home. Generally, the listing site gives you the option to send a message or will just give you their personal info and you can reach out directly.Here is a great way to start the conversation:“Hi, Joe!I noticed your home on Zillow.com. Would you be willing to do a rent-to-own agreement? I don’t quite qualify for a mortgage and I’ll need more time to come up with a down payment but we can pay monthly rent and are looking to move into a new place right away! Let me know if you would like to move your house a little faster and I’ll show you an example of an RTO contract. It’s basically agreeing to rent for a number of years then giving me an option to buy if I’m qualified by then. If I can’t qualify, no skin off your back. We will just discuss whether I can keep renting from you or if you’d like to try selling yourhome again.Thank you for your time!Katie888.777.4321”This exact message can be sent to many sellers and sellers agents, just makesure to adjust the applicable fields.Here are some quick tips:► Include personal information so they can contact you back, this also helpsyou not look like a robot or scam.► Remember that houses that have been on the market for the longesttimes generally have the best chances of considering other options likethis.► The more messages you send like this the more options you will have. Weknow people who have sent this to upwards of 50 homes they wouldmove into, just to find that perfect house and agreement. Don’t give up ifyou get turned down many times! You only need one person to agree tomake it a success!

Buyers Beware! While RTO deals can provide huge benefits for both the owner of the home and the buyer of the home,remember that some sellers use RTO to make profit atthe renters expense.

If you get into an RTO home andyou can’t qualify to buy your home at the end of therent period, all of that extra rent you’ve been payingtoward your down payment will go right into the owners pocket!

To make sure you are protected you will need to have a solid contract in place and serious plan to be mortgage ready by the end of your rental period.

This is why having a plan in place for your credit is soimportant, both before and after you’ve found your home!

RTO Contracts

You’ve found a house and a willing seller!

Now it’s time to go over the agreement. Remember we will go over a typical rent-to-own agreement but it’s good to note that they can vary from person to person and state to state.

A rent-to-own agreement is made up of two agreements: a standard rent agreement usually called a lease agreement, and an option to purchase. Something to note in a rent-to-own agreement is that the seller keeps the title of the house during the rental period. In other words, the starting point of this kind of arrangement is exactly like renting any other place which means you still have to uphold your end of the bargain as if you are a regular renter. 

This includes terms such as how long you will rent, the amount of rent to be paid, and what responsibilities fall on the seller vs the renter. In RTO contracts you also agree to an “option to purchase” which grants the renter an option or right to buy the rental property within a specified period of time, sometimes in exchange for a fee, that is either paid upfront or from a portion of your rent every month. A renter who does not exercise the option to purchase is not entitled to a refund of the fee or any refund in rent that may have gone toward a down payment. Because so much is at stake for both seller and the renter, it is crucial that the option to purchase covers all important terms and conditions such as the how long you will rent, how quickly you will need to buy the house once that rental period is over, and the purchase price of the house.Here are a few ways RTO agreements vary from regular rent agreements:

Just as in a standard lease or rental agreement, the renter has a duty to make timely and exact payments of rent. In a rent-to-own arrangement, rent payments are often higher because an agreed-upon percentage of the monthly rent is typically placed in an escrow account.

It is the owners duty to set aside the agreed-upon percentage of rent. The owner either reserves the escrow funds and refunds the renter upon purchase of the home, or simplyapplies a percentage of the rent payments toward the principle of the house. In this manner, the renter builds equity in the house throughout the duration of the rentalperiod.

Unlike traditional rent, in which the landlord is typically responsible for making all repairs, rent-to-own tenants usually, repair the rental property at their own expense. This is considered a fair bargain since, presumably, the renter will eventually own the home. Although the renter may never exercise the option to purchase the property, renters should always inspect the premises and order an appraisal before signing a lease with an option to purchase.Here’s why:► The future purchase price of the home is often agreedupon at the time the rent-to-own agreement is signed.An appraisal will ensure that the renter is paying a fairprice for the home.► A thorough inspection can determine whether therenter will need to make future major repairs such asthose to restore leaking roofs, broken HVAC andheating units, or clogged sewage drains. This will help!When it comes to the RTO contract we highly recommend seeking legal counsel. You can pay small fees to get an RTO contract written up and approved by an attorney but unless you know the ins and outs you should make sure you are protected.The renter makes the decision of whether entering into the agreement is sensible. Insome states, landlords who lease a home with an option to purchase must discloseimportant information about the condition of the property, providing extra protection to tenants who are buying a home under an RTO agreement. Check your state law on required real estate disclosures.If an RTO arrangement goes wrong you can wind up needing a new place to live andlosing hundreds or thousands of dollars.

For more understanding about Rent-to-Own contracts, you can view our RTO Guide product which includes a sample RTO Contract to show you how to draw one up yourself.

The Ultimate Goal: Buying Your Home

So you’ve found your house, you have signed an RTO agreement and you’re moving in to start your new life! You’ve found yourself in a great spot, already building equity in a home you plan to buy and ready to put down roots. You may feel like you’ve finally reached your goal but remember this is where it all begins! I really can’t stress this enough! If you don’t spend the rental period working toward qualifying for a mortgage you could wind up in a worse situation than you started. So what are some steps you can take to insure you will be ready to buy your home?  

► Maintain or grow your income. You will need to prove you have had two years of steady or increasing income when you go to apply for a home loan.  

► Aim to save at least 5% of the purchase price (some or all of which should have already been set in your contract) for a down payment. Many programs such as FHA,  VA, and even USDA require smaller or no down payments, but to play it safe you will want to make sure you have a nest egg ready to put toward the purchase of your home.  

► Most importantly, get your credit ready! Many of our clients make it to the bare minimum fico requirements to get approved for a loan. This can put you in a bad spot! When it comes to lenders, the worse your credit is the higher the interest they can charge you. If you have a few months or years to repair and build your credit you should take advantage of it every single day! Set your goal at a high credit rating 

like 750-800. This can affect your interest rate and save you tens of thousands of dollars in the life of your loan. With great credit, you also have many more options like buying the house outright or being prepared to buy a different one as they enter the market that might better suit your family’s needs.  

The biggest takeaway from RTO is that no matter what you need to prepare to qualify for a mortgage. Ideally, you would qualify for a mortgage without having to find an RTO  deal. Being able to buy your house expands your options, increases your quality of life for the same monthly payment as rent, and is the number one step to building wealth in the USA. No wonder we refer to homeownership as the American Dream!

This concludes our Rent-to-Own Quickstart.  

Congratulations on taking the next step toward homeownership!

Curious About RTO?

Let us show you how to use Rent-to-Own to find a great deal for your home.  

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