Is Rent-to-Own Right for You?

Looking for a way to buy a home but don’t qualify for a traditional mortgage? Renting to own might be the solution. With a rent-to-own arrangement, you can take time to improve your credit score while saving for a down payment.

What is Rent-to-Own?

Rent-to-own (sometimes called lease-to-own or lease-purchase) is an arrangement where you rent a home and have the option (or obligation in some cases) to buy the home down the road at a predetermined price. During the rental period, a portion of your monthly payment typically goes toward a future down payment or purchase credit.

Common Terms in Rent-to-Own Contracts

Knowing the terminology in these type of contracts will help you read and understand the terms so you’re making an informed decision. Here are the key terms you’ll see in these typical contracts:

• Option fee: An upfront payment for the right to purchase the home. This is typically 1-5% of the home’s value and is non-refundable if you don’t buy the home. In some cases, this fee is credited toward the purchase price.
• Monthly rent credits: The portion of your rent that is credited toward the purchase price. This ranges from $100 to $500. Again, you lose this money if you don’t purchase the home.
• Purchase price: What you’ll eventually pay for the home. Although, in many cases, it doesn’t change over the course of the contract, it may go up. Read the contract carefully to see if there is a predetermined rate of increase.
• Lease term: Usually 1-3 years, but can be longer. Lease terms occasionally include an option to extend the lease.

Types of Rent-to-Own Agreements

If you’re wondering, “How does rent to own homes work?” there are a few different models. There are two main types of rent-to-own contracts, and another option called a “contract for deed,” which is not strictly rent-to-own, but is sometimes grouped in this category.

Lease-Option Agreements

In a lease-option agreement, you rent the home for a specified period (typically 1-3 years), and you have the option to buy it before the lease ends. If you decide not to move forward with the purchase, you can walk away, although you may lose any option fee paid upfront, as well as your rent credits.

Lease-Purchase Agreements

A lease-purchase agreement obligates you to buy the home at the end of the lease. The purchase price may be agreed upon at the start of the contract or determined based on the market value at the time of purchase. This option is better for buyers who are confident they’ll be able to secure financing by the end of the lease.

Contract for Deed (Land Contract)

With a contract for deed, you purchase the property from the seller by making installment payments, similar to a mortgage. The difference is that the seller retains legal title to the home until you’ve paid off the full purchase price. Once the final payment is made, the title is transferred to you. While they are not the same as a rent-to-own agreement, a contract for deed may appear when you’re searching for “rent-to-own houses near me” or “rent own near me.”

Advantages of Rent to Own

These homes have several key benefits. First, they give you time to improve your credit score while living in the home, which can help with getting your mortgage approved down the line. Second, with many of these agreements, a portion of your rent is put in an escrow account to help you make your downpayment; in this way, your rent becomes a way of forcing you to save. Finally, you can lock in a purchase price from the start, which gives you security and helps you budget for the future.

Disadvantages of Rent to Own

These homes also have some drawbacks and financial risks. First, monthly payments are often higher than standard rent since part of your rent goes toward your future down payment. Second, if you’re unable to secure financing at the end of the lease, you could lose your option fee and any rent credits you’ve accumulated. Third, because rent-to-own homes aren’t as widely available as other rentals, you may have to compromise on location and features. Finally, tenants in rent-to-own agreements often have to take on maintenance responsibilities during the rental period, sometimes even property taxes and insurance.

Finding Rent-to-Own Homes

Not all of these opportunities are created equal. In some cases, the companies offering these homes have long track records of helping people buy their own property. Others take advantage of people who are looking for a pathway to home ownership.

Look for property management companies and rent-to-own companies with good reputations and a long history in the business, and work with a real estate agent who specializes in these properties. Avoid arrangements that require large up-front fees, agreements with high monthly rents, and properties that need a lot of repairs. If you feel pressured to sign a deal, walk away.

Getting Ready to Rent to Own

Before you sign anything, follow these important steps:

Assess your Financial Situation

Create a realistic budget for your rent-to-own home, including all monthly homeowner expenses. Your budget should include additional savings beyond your rent credits. Make a plan for improving your credit score during the lease term so you’ll qualify for a mortgage when the time comes.

Protect Yourself Legally

Have the rent-to-own contract reviewed by a real estate lawyer. Make sure you have a clear picture of what your rights and obligations are under the agreement. Finally, keep detailed records of all transactions and communications between you and the property owner.

Due Your Due Diligence

Research the neighborhood and get comparable values for similar homes to make sure you’re not overpaying. Also get a professional home inspection and check the title on the home by ordering a title search. In the title search report, look for liens and taxes owing on the property. The title search should also verify that the seller of the property actually owns it and has the right to enter into this type of agreement with you.

If you’re considering one of these leases, work with experienced professionals, including real estate agents, attorneys, and financial advisors, who can help you evaluate whether it’s the right choice for your situation. With proper guidance and planning on your part, rent to own can be an excellent way to buy your own home.