What we'll cover
How rent-to-own homes work
Cost and maintenance considerations
Pros and cons of rent-to-own
Wouldn't it be nice if, instead of paying rent on one home while saving for another, you could essentially build equity through rent payments? This is a possibility through rent-to-own programs. When the housing market gets tough, the rent-to-own option could make sense for you.
Read more: Which mortgage is right for you?
Opportunity for future ownership
A rent-to-own home agreement means you rent a home for a certain period of time with the opportunity to buy it at the end of the lease. As you pay rent, the seller sets aside a portion of that cash toward your equity in the home — essentially building up your down payment over time.
The two types of rent-to-own agreements are:
Lease option: This gives you the ability to buy at the end of your lease period, but you aren't obligated to.
Lease purchase: This contractually requires you to buy the home at the end of your lease — even if you can't necessarily afford it.
Oftentimes, rent-to-own buyers must handle regular upkeep that landlords typically cover, like lawn care.
Cost considerations
Most rent-to-own agreements will include the following elements:
Option fee
A one-time, upfront payment to the seller that gives you the option to buy the home in the future. It's usually 1% to 5% of the home's purchase price and non-refundable — whether you buy or not.
Purchase price
Rent-to-own contracts specify when and how the purchase price will be decided: when the contract is drawn up (potentially years before your lease ends) or when the lease ends.
Sellers often prefer locking in a purchase price based on the predicted future value of the property at the time of signing the contract, especially if home values are rising. If prices fall during the leasing period, you're still required to pay the agreed-upon amount — potentially more than the property is worth.
Rent payments
The monthly cost includes a credit toward your home, so you'll likely pay a higher amount than what's typical in the area.
Maintenance and repairs
Oftentimes, rent-to-own buyers must handle regular upkeep that landlords typically cover, like lawn care. You might also be on the hook for more serious fixes including appliance repairs.
Because rent-to-own contracts can be tricky, it's important to work with a real estate attorney to thoroughly review the terms and timelines so that you understand what you're responsible for during your lease.
Pros and cons of rent-to-own
If you don't have the savings for a down payment or the credit score you need to qualify for a mortgage, or have a high debt-to-income ratio, renting-to-own can provide an alternative route to homeownership. But it's important to weigh their benefits and drawbacks as you consider if you're ready to buy a house.
Benefits for rent-to-own buyers include:
Less substantial down payment
Opportunity to build equity
Ability to secure a home before you're ready for a mortgage
Lower barrier to entry for homeownership
But this path to homeownership can also present challenges. Alongside cost factors, like higher rent payments and maintenance responsibilities, drawbacks can include:
Potential to be locked into an overvalued home price
A commitment to buy before you're ready
Lost money if you decide not to buy
Potentially being sued if you break lease purchase contract
The seller's perspective and closing
It's a good idea to know where sellers are coming from in a rent-to-own situation.
They might enter a rent-to-own agreement in an attempt to earn rental income without having to perform traditional landlord duties, and potentially sell their home for more than it's worth. Sellers also run risks of their renter ultimately not deciding to purchase or missing the opportunity to sell their home for a higher price after locking into a contract.
As a buyer, the end of your contract and potential closing will look differently depending on whether you signed a lease option or lease purchase agreement. If you signed a lease option and choose not to buy, you'll likely forfeit any upfront fees you paid and rent credits you built up. If you buy, your closing will be similar to a typical home purchase, and you'll probably need to obtain a mortgage at this time.
If you sign a lease purchase contract, you may have a legal obligation to purchase the home. But if you can't qualify for a mortgage and fulfill your agreement to buy the home, you may risk being sued.
It’s all in the contract
Rent-to-own homes can help you out as a homebuyer, but you must do your due diligence. Take time to research the home and seller, and enlist professional help where it's beneficial. When it comes to your finances and future home, no detail is too small.
