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Why pay rent to someone – especially when you’ll never see that money again – when you can own your own home and build equity?
Owning a home has its monetary benefits, but they also come at a high price of keeping your finances in order.
The problem is, buying a home requires good credit scores, a good income, and a track record of making on-time payments. Furthermore, you need a significant amount of money as a down payment when applying for a mortgage. If your home costs $350,000, then your down payment is likely to be at least 5% of that, or $17,500, and that’s before closing costs.
What about those who have had some financial trouble? Or someone who hasn’t been able to save up that $17,500? Perhaps you’ve had some job issues causing you to have a significant time of unemployment without the track record of income?
For those who fall into this category, or those who wish to start small and build up to buying a home of their own, you can begin through rent to own mobile homes. Here’s how it works.
What Are Rent to Own Mobile Homes?
A rent to own contract is when a renter signs a contract with his/her landlord where the renter commits to renting the home for a designated time with the option to purchase the house at a pre-determined price before the contract ends. In other words, if you aren’t in a position right now to buy a home, you can rent the home with intentions of building up your finances to purchase that home at a future date.
This enables the landlord to take advantage of rental income while allowing them to sell their home should they see fit, while also enabling a renter to build up their credit, savings, income, and finances to purchase a home to build equity.
The other benefit to a renter when using a rent to own contract is that they also get to keep the equity that their rent pays down when purchasing the house. It’s a great way to start building equity and get into your next home if your finances are limited. In this case, your rent is going towards something significant.
→ Related reading: Renting vs. Buying
Benefits of Rent to Own Mobile Homes
First of all, why would you want to do a rent to own contract with a mobile home? Well, as stated in the introduction to this article, purchasing a single-family home requires a major down payment, which limits your options from the get-go. Mobile homes are cheaper options to purchase while still providing many of the benefits of owning your own home. Here are some of the biggest benefits of rent to own mobile homes…
1. Pre-Determined Home Price
When you sign a rent to own contract, the contract will state the purchase price of the home should you decide to buy towards the end of the contract. This locks in your price regardless of what the market does in the near future.
Let’s say you sign a rent to own mobile home contract that states you can purchase the mobile home for $50,000. After signing the contract, the mobile home market skyrockets in price, and the home you just signed a rent to own contract with is now worth $65,000. That means you are technically purchasing a $65,000 home for $50,000, giving you a major equity advantage upfront gaining an extra $15,000 just because of the timing. All of this is possible because you had a set price agreed to in the contract.
2. Bad Credit
When it comes to purchasing any asset, even a car, your credit is perhaps the most important factor when banks decide whether to lend you money or not. So, if you have bad credit, what are you to do? How can you purchase a home if you don’t have good credit?
Rent to own mobile home contracts give you the benefit of the doubt by agreeing to sell you the home in the future so you can repair your credit score and get approved by a bank for a mortgage loan. It often takes six to twelve months or more to build your credit, and a rent to own contract may last up to 36 months or more, giving you plenty of time to get your finances on track.
3. Little Money for Down Payment
Mortgage loans still act the same for mobile homes (for the most part) as they do for single-family homes. You still need a down payment to have some skin in the game when taking out a mortgage. The biggest difference is you don’t have to save nearly as much money as you would if you were purchasing a single-family home.
If your income is only $45,000 and you have to save that $17,500 to make a down payment, it may be years before you can be a homeowner. But, if you only have to save $5,000 for a down payment, you could be a homeowner in just a few months if you save aggressively.
4. Less Liability
When talking about less liability, I’m referring to less liability to you when entering a rent to own contract. A rent to own contract doesn’t mean that you are required to purchase the home in the future, unless it’s stated in the contract, at which point it would then be considered a lease-purchase contract.
A rent to own contract gives you the option to purchase, not the obligation to purchase. Let’s face it, finances may already be a struggle, and the last thing you need is another contract making things even worse than they already are. With a rent to own contract, you are not taking on an extra liability, but a potential opportunity should you decide to purchase.
5. Build Equity
Equity is the portion of the home that you own. For example, if your mobile home is worth $65,000 and your mortgage note has a balance of $50,000, then you have $15,000 of equity in your home. Should you sell your home, you’d pocket $15,000 cash, minus fees.
This is the benefit of owning your own home and a benefit to those who enter a rent to own contract. In other words, once you enter the contract you start building up equity that will be yours when you purchase. Each of your rent payments will go towards home equity that you will then own once you purchase your mobile home property before the end of the contract. You aren’t giving your rent money away, never to see it again, as the case may be with a regular rent payment.
6. Great Starter Home Options
Purchasing a mobile home to start with is a great option to begin building homeownership. Why? Because they are cheaper, require less money down, and are generally smaller than a regular single-family property. That means they are probably larger than your average apartment, but smaller than your average single-family home (generally speaking), allowing you to ease your way into homeownership and managing home maintenance.
→ Related reading: The Costs of Owning a Home
7. Long-Term Investment Options
What if you could be the landlord of your own property and collect rent payments from renters? Mobile homes can make great rental investments. In this case, your mobile home rent to own agreement may have the option to turn your property into a rental once you upgrade to a single-family home or condo.
Some of the best opportunities to make money start with baby steps and can evolve into a great long-term investment option and that certainly is an option when using rent to own contracts to purchase a mobile home.
8. Learn the Basics of Homeownership
Owning a home comes with the cost of maintaining that home as well. What used to be a call to the landlord maintenance technician now becomes your own responsibility as a homeowner. Furthermore, owning a home may also require that you set aside money to pay for common repairs or even emergencies in the event of natural disasters.
All of this is required as a homeowner, and you will learn relatively quickly, especially when you are the owner of a new mobile home. Your rent to own contract gives you that ability to learn from the get-go the ins and outs of homeownership and added time to build up your finances for when you decide to purchase.
Risks of Rent to Own Mobile Homes
Along with the potential for great rewards comes risk. Mobile homes rent to own contracts have a few risks that you should be aware of before entering a contract. Most risks are related to your financial profile and added fees associated should things turn south in your contract.
Rent to own contracts are also considered a type of “options” contract much like a stock market options contract. The contract has its benefits, but it also comes at a cost. The benefit of setting a pre-determined price and an option to purchase a home in the future costs money, called an option fee. Some option fees can cost as much as 6% or more of the home value, depending on the size of the contract and what’s at stake for both the buyer and the seller.
Keep in mind that this may be on top of the down payment fee you would have to pay the bank later in the contract in order to get a loan for the purchase. That means you pay an option fee when signing the contract, then you need to have extra money to put down on your loan when you decide to purchase. If the mobile home is worth $100,000, that means you’d pay anywhere from $1,000 to $6,000 just to sign the rent to own agreement, and another $5,000 as a down payment when you decide to purchase the home.
Still, this adds up to be less money than a down payment on a $350,000 single family home, but it can still be a sizeable amount.
Loss of Money
When purchasing a rent to own contract, you are betting on yourself being able to be in a position to purchase the home in the future. If you paid $6,000 to sign your rent to own contract, and the contract is about to expire but you still can’t purchase the home, you’ve just lost $6,000 and you’re likely in a worse off situation than what you began with.
You Don’t Own the Property
Not to confuse the term property with the actual home. Sure, when you purchase a mobile home you own the home, but you do not own the property that the home sits on. The property is likely owned by another landlord to whom you pay rent to lease that piece of land for your mobile home (this is usually the case, but not always).
Why is this a risk? Because if your landlord decides to sell the property, it’s likely that you will be required to move your home to another location. This costs you both in time, money, and inconvenience. What’s more, is that you don’t have a voice in making decisions about how that property is handled which can also affect living comfort within your mobile home.
For example, if your landlord decides to include a clause in the property agreement that they don’t allow pets on the land and you have a dog, you’ll have no say because you don’t own the land and thus can’t vote one way or another.
→ Related reading: The Realities of Mortgage-Free Living
Beware of Scams
The biggest question you should be asking yourself when signing a rent to own property is “Why does the landlord want to sell the home?” It’s not uncommon for a landlord to not disclose something in the seller’s agreement such as an unknown lien on the property that later becomes your problem as the new homeowner.
Other potential scams that have happened include landlords selling rent to own contracts on properties that they don’t own. Perhaps they are renters themselves and act as owners of the home when you decide to purchase a rent to own contract from them. In this case, they would have collected the option fee and potentially other rental fees, cheating you out of a lot of money.
In short, be sure to know everything about the home you are purchasing to ensure you don’t enter a fraudulent contract costing you thousands of dollars and months of headache and frustration.
A Declining Mobile Home Market
We talked about the benefit of home prices increasing after you enter a rent to own contract, enabling you to take advantage of major equity when you purchase that home. Conversely, if the mobile home market decides to take a nosedive after you’ve signed the rent to own contract, you’ve just set yourself up for a bad deal and are out the option fee you paid upfront.
Another potential risk is the mobile home market taking a nosedive after you’ve already purchased the home, putting you upside down on your mortgage. If you purchase the home for $110,000 and the market decides to take a dive and drops your market value to $90,000, then you just lost $20,000, and who knows how long it will be before the market returns to its original values.
They Are Depreciating Assets
The biggest difference between owning a mobile home and a single-family home is that you do not own the property that the mobile home sits on. We briefly discussed this above. The property is, in fact, the piece of the equation that appreciates the most over time. As more and more people purchase land that their homes sit on, the less land there is available, naturally causing real estate properties to increase in value over time.
This is not the case with mobile homes. You only own the mobile home structure, which is an asset that loses value over time. Why? Because the structure will experience wear and tear if not kept up, and the more rugged and old it becomes, the less demand there will be to purchase the home.
Should I Purchase A Rent to Own Mobile Home?
Everything depends on your plan and your current situation. If you’re simply fixing up your finances, want to start building some equity in a home, and have a solid plan in the works, then a rent to own mobile home contract may be a great option to get a few steps ahead of the game.
If, on the other hand, you are deep in debt, have a poor credit score, collections against you, and are behind on your taxes, it’s likely that purchasing rent to own mobile home contract will only hurt you unless you can fix your finances before the purchase. The risk you are taking is whether you’re able to get your finances and income in a place to where you can purchase the home before the contract ends.
When all is said, rent to own mobile homes are great opportunities should the person in the right scenario find a good home to enter a rent to own contract with.