Another popular Rent-to-Own question is this – “How much is the deposit?” That’s one of the first things prospective buyers want to know.
Well, let’s start by giving the standard answer as follows:
Generally, under a rent-to-own, the deposit runs from 2-5% of the selling price.
This answer comes from the research I’ve done. Is it the right answer? Sure, why not?
But, let me tell you a little secret – let me tell you the real answer. The real answer is this …
The rent-to-own deposit is whatever you negotiate!
If you’re the seller, you want a big deposit. The bigger the better!
If you’re a buyer, you want a small deposit. The smaller the better!
What is the purpose of the deposit?
Just why is there a deposit in a rent to own deal? What’s the purpose?
Well, it turns out the deposit is really payment for the “option to buy.”
Remember, the rent to own deal comprises 2 parts. First, a standard residential lease. Next, an option to buy contract. The deposit pays for the option to buy contract.
As such, the deposit is non-refundable. It’s a fee; it’s a cost; it’s a way for the buyer to lock in the deal for a 2 to 3 year time period. It’s compensation to the seller for giving up control of the property over the option period.
Normally, the deposit amount is deducted from the price of the property if/when the buyer pays out the seller and purchases the property. Of course, the buyer must complete the purchase prior to the end of the option period, normally 2 to 3 years.
Now, let’s look at the deposit from both sides of the deal. First, from the seller’s prospective.
Deposit – Seller’s Perspective
The seller wants a big deposit. Does that surprise you? I didn’t think so!
Let’s say you’re selling your home under a rent-to-own deal. You’ve got it priced at $400,000. You have two offers, both identical except for the deposit. One buyer has a $10,000 deposit, the other is willing to put down $15,000. These numbers represent 2.5% and 3.8% deposits respectively.
Which person do you think is more serious about buying your home?
Remember, you’re selling an “option to buy contract.” So, are you going to sell it to the lowest bidder? Or, the highest bidder? … I thought so …
Deposit – Buyer’s Perspective
As a buyer, you want the lowest deposit. No surprise here, right?
Let’s say you’re making an offer on a rent-to-own and you’ve got $20,000 available for deposit. But, the seller is only asking for $10,000. Are you going to offer $20,000? Didn’t think so.
What if the seller is only asking for $5,000, how much are you willing to offer now?
Get the idea?
Now, there may be a case where the seller is only asking for $5,000 but there are three people ahead of you to buy the home. This is where you may want to move yourself up on the list by offering a higher deposit. Maybe you’d offer $7,000 for the “option to buy.” Chances are, you’d move to the top of the sellers list.
And, another reason why you want the lowest deposit … less money on the line. Remember, the deposit is non-refundable. If for some reason you don’t purchase the property during the option period, you lose the deposit. The lower the deposit, the less you forfeit.
Deposit – Summary
Under a rent-to-own arrangement, the deposit is really a fee. It’s the purchase price of the “option contract.” As such, it’s normally non-refundable. The standard “option contract” deposit (fee) is between 2 and 5% of the selling price of the home.
But, remember our little secret … the deposit – like virtually every aspect of a rent-to-own deal – is negotiable!