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What are option fees and rent premiums?

When the housing market is down, both buying and selling a home can be challenging. Buyers find it difficult to accumulate the cash necessary for a down payment and they can’t get enough credit to secure a mortgage. Sellers, on the other hand, often feel pressured to sell their property at a loss because they can’t pay two mortgages at once. Therefore, the option of rent-to-own property is an ideal compromise, which benefits both the buyer and the seller.

In a rent-to-own arrangement, the renter leases the property for a specific number of years at a fixed rental price with the option to buy the home at the end of the lease period. The renter has to pay a single option fee upfront and a monthly rent premium on top of the rental price. The money accumulated from the monthly rent premium and the option fee gets credited toward a down payment if he eventually decides to purchase the property. If the lease is up and the renter chooses not to purchase the property, either because he finds the property faulty or because he is still not eligible for a mortgage, the money he put toward the down payment gets forfeited.

The advantage of the rent-to-own arrangement is that the seller makes money to cover his second mortgage while waiting for his property to sell. Even in the worst-case scenario, where the renter chooses not to purchase the property, the seller still comes out ahead by keeping the option fee. Buyers have the advantage of extra time to accumulate funds and credit needed for purchasing the property. They can also check out the house thoroughly over the course of the lease period to be absolutely certain the property is in good condition before investing additional money.