What Is a Rent-to-Own Home?
A rent-to-own home is a house you can buy through a rent-to-own agreement. With this type of contract, you agree to rent a property for a specific time period before gaining ownership. The time period can range from several months to several years, depending on the specifics of the contract.
Like any other home, companies or individual sellers can own rent-to-own (or lease-to-own) homes, but they work much differently than the typical home-buying process.
As part of the contract, the seller agrees to hold a designated amount of money of each rent payment to go toward the buyer’s equity in the home when they purchase it.
Sounds like nothing can go wrong here, right? Let’s be honest: It doesn’t take much for a rent-to-own agreement to go south—fast.
PROS AND CONS OF RENT TO OWN PROPERTY
Pros for Buyers
You build a down payment over time. Instead of having to fork over a significant down payment when you move in, you build equity over a specific period of time by paying higher rent.
You can avoid buyer competition. At the end of the rent-to-own agreement, you won’t be up against other buyers for the property.
You don’t have to qualify for a mortgage right away. You may be drawn to a rent-to-own program because you can’t afford to buy a home yet. Maybe you’re still paying off debt or you don’t have a down payment saved. Moving into a house without qualifying for a mortgage may seem like the answer, but here’s the truth: The chances of your rent-to-own agreement falling through go way up if you’re already in a financial mess.
Cons for Buyers
Your rent will be more expensive. Even if your contract is set up so that part of your rent is going toward equity in the home every month, your rent prices will be higher because of that. Why not just rent a place for less money and keep the money you’re setting aside for a down payment in your own bank account instead of your landlord’s?
You’ll pay nonrefundable option money. You will have to pay a percentage of the home’s price to have the option to purchase the home down the road. These are payments you probably won’t get back if the deal doesn’t work out.
You may have to pay for repairs and maintenance. In rent-to-own agreements, it’s not uncommon for you, as the potential buyer, to be responsible for all repairs and maintenance. Those unexpected emergencies can put a serious hole in your pocket—for a house that isn’t even yours yet!
Home values could go down. If you have a rent-to-own contract for a couple years, you have no way of knowing what the real estate market or local economy could do during that time. Sure, your home value could go up, but it could also drop. The purchase price you lock in at the start of the contract is usually inflated to account for rising home values. That means, you could end up paying more than the property is actually worth.
You could decide you don’t want to purchase the house. Let’s say you get a new job that requires you relocate to a new city. Or maybe you still can’t qualify for a mortgage at the end of the contract term. Perhaps you just decide this house isn’t for you. If you’re in a lease option agreement, you can walk away from the contract. But what happens to all of the cash you forked over in higher rent and option money? That’s thousands of dollars you won’t get back.
The contract favors the seller. Something as small as a late rent check or not paying for a repair in a “timely manner” could release the landlord from any obligation to honor the contract. There won’t be a knight in shining armor headed your way to save the day—or your contract.
Events out of your control could cause you to lose your equity. If the landlord’s financial situation changes and the house goes into foreclosure, that house goes to the bank—not to you. Or, if the seller just up and changes their mind after they’ve signed a rent-to-own contract, it would take expensive legal action to enforce the contract in that scenario. That’s a cost you may not be able (or willing) to pay.
Cons for Buyers
Your rent will be more expensive. Even if your contract is set up so that part of your rent is going toward equity in the home every month, your rent prices will be higher because of that. Why not just rent a place for less money and keep the money you’re setting aside for a down payment in your own bank account instead of your landlord’s?
You’ll pay nonrefundable option money. You will have to pay a percentage of the home’s price to have the option to purchase the home down the road. These are payments you probably won’t get back if the deal doesn’t work out.
You may have to pay for repairs and maintenance. In rent-to-own agreements, it’s not uncommon for you, as the potential buyer, to be responsible for all repairs and maintenance. Those unexpected emergencies can put a serious hole in your pocket—for a house that isn’t even yours yet!
Home values could go down. If you have a rent-to-own contract for a couple years, you have no way of knowing what the real estate market or local economy could do during that time. Sure, your home value could go up, but it could also drop. The purchase price you lock in at the start of the contract is usually inflated to account for rising home values. That means, you could end up paying more than the property is actually worth.
You could decide you don’t want to purchase the house. Let’s say you get a new job that requires you relocate to a new city. Or maybe you still can’t qualify for a mortgage at the end of the contract term. Perhaps you just decide this house isn’t for you. If you’re in a lease option agreement, you can walk away from the contract. But what happens to all of the cash you forked over in higher rent and option money? That’s thousands of dollars you won’t get back.
The contract favors the seller. Something as small as a late rent check or not paying for a repair in a “timely manner” could release the landlord from any obligation to honor the contract. There won’t be a knight in shining armor headed your way to save the day—or your contract.
Events out of your control could cause you to lose your equity. If the landlord’s financial situation changes and the house goes into foreclosure, that house goes to the bank—not to you. Or, if the seller just up and changes their mind after they’ve signed a rent-to-own contract, it would take expensive legal action to enforce the contract in that scenario. That’s a cost you may not be able (or willing) to pay.
When you have dreams of buying the perfect home for you and your family, it can be all too easy to rush the process. Just remember: Although a rent-to-own agreement is a legally binding document, it has way too many loopholes to be a guarantee. Keep your money in your own bank account and steer clear of rent-to-own contracts!
Alternatives to the Rent-to-Own Process
When it comes to rent-to-own homes, the cons outweigh the pros. If you want to make a smart decision for your future, it’s simple. Avoid a rent-to-own situation, even if it means you have to wait to move.
There’s no shame in renting while you pay down debt and save an emergency fund. In fact, that’s the best thing you can do! After your finances are in order, you can start putting money aside for a hefty down payment. Don’t buy a house—or sign an agreement to buy a house—when you’re broke!