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NEW YORK (
TheStreet) -- For buyers and sellers in a dicey housing market, a
rent-to-own deal can be the perfect compromise. But how can each party know if the terms make sense?
Most people find a standard home sale challenging enough, with negotiations on price, closing dates and contingencies. But the
rent-to-own deal adds other considerations: the price of the option to buy, the monthly rent and rent premium and the duration of the deal.
The seller must determine whether the deal is more profitable than an immediate sale, probably at a lower price. The buyer must decide whether the extra expenses are better than alternatives such as renting another property until it's a better time to buy.
To help with these calculations, Jack M. Guttentag, an emeritus finance professor at The University of Pennsylvania's Wharton School, has created a
free online calculator on his website,
The Mortgage Professor.
While all terms are negotiable, in a typical rent-to-own deal the home's sales price is somewhat higher than the owner could expect to get immediately, and lower than the renter might expect to pay later. For an upfront premium that's usually between 1% and 5% of the sales price, the renter gets the option to buy anytime before the deal ends, usually in one to three years, while the owner agrees not to sell to anyone else during that period or to raise the price.
During the option period, the renter pays rent plus a monthly "rent credit" to compensate the owner for some of the risks involved. Typically, the premium and rent credits that have been paid are applied to the purchase payment if the renter opts to buy. The owner keeps those funds if there is no sale, and is free to sell to someone else after the deal expires.