Renting to Own

brown and white concrete house
by Advice Chaser
by Advice Chaser

Many renters plan to live in an area for a short time and have no desire to buy a home. But others would happily buy a home if they could afford the down payment. Rent to own can be a solution to this problem. You begin by renting, but with the possibility of buying the home in a few years. While less common than conventional renting, rent to own has advantages for both renter and landlord.

brown and white concrete house

What Is Rent to Own?

A rent-to-own lease is simply any lease where you can buy the home at the end of the lease. This can take the form of a lease-option agreement, where you have the option to buy the home at the end of the lease, or a lease-purchase agreement, where you agree in advance that you will buy it.

During the rental period, some of your rent goes toward your future down payment. To counterbalance this, the rent may be higher than at a standard rental property. Or you may agree to take on the maintenance yourself. In the latter case, you’ll be well motivated to take care of the property—it’ll be yours someday, so you’ll be the one to enjoy the home’s good condition.

In some agreements, you will pay a nonrefundable upfront fee at the beginning, called the option fee. This runs from 1% to 5% of the purchase price. This amount is negotiable. If it’s more than a down payment would be, you should try to bargain it down.

How to Navigate the Process

A rent to own agreement is much more complex than a simple rental agreement. You’ll need to read the contract carefully. Ideally, you should have a professional read it as well. Rent-to-own contracts can be great for buyers with poor credit, no down payment saved, or insufficient funds to buy in an expensive real estate market. However, if you’re in that position, you’re also vulnerable to financial problems. Make sure you know exactly what you’re getting into.

Your contract will specify whether you have an option to buy or will be required to buy. If possible, you should choose to have an option to buy. Your financial situation may not be the same when the lease term is over. If you can’t secure financing to buy the home, you’ll be in a terrible situation. Likewise, you should determine how the home will be valued. Some contracts lock in the price of the home when you begin renting. Others have you buy the house at its market value at the time of purchase. In the latter case, you may find the price has gone up significantly since you moved in.

You should also check to see exactly what maintenance will be your responsibility. In many contracts, the renter keeps up the yard, painting, and other minor repairs, while major repairs like the roof will be the landlord’s responsibility. But in others, you’ll be on the hook for everything. Can you afford that? You won’t have the option, as homeowners do, of getting a home equity loan to pay for repairs.

Is It For You?

There are plenty of reasons why people select rent-to-own leases. Anyone who wants to own a home but has been locked out of home ownership might consider one. Here are a few occasions when it’s a good idea to rent to own:

  • You don’t have cash for a down payment
  • Your credit is poor now, but you expect it to be better by the end of the lease
  • The housing market in your chosen area is too expensive for your savings
  • You want to try living in the area before you commit to buying there
  • You know you need to rent for a while, but you aren’t eager to move again too soon

But there are also contraindications. Not everyone is in a good position to try a rent-to-own agreement. Here are times you shouldn’t sign a rent-to-own lease:

  • Your credit is bad now, but you have no expectation it will get better, so you may not be able to qualify for a loan by the end of the term
  • You have trouble paying for rent at all and will not be able to save during the lease term
  • Houses in the area are so expensive you will not be able to afford one even with the help of the rent-to-own lease
  • The seller seems sketchy or is in a precarious financial position themselves
  • The house is in poor condition and will cost more to keep up than you can afford

No matter how much you dream of homeownership, renting to own is not a guarantee of achieving it. This arrangement is good for people who are close to being able to buy a home but need a little extra time. It’s not so good for people whose finances are precarious enough even renting is a struggle. Remember, rents are usually higher when renting to own. It’s far better to have a rent payment you know you can afford, even if it means you’ll have to defer homeownership a few more years.

Talk to an Expert

Rent-to-own contracts can be complex, with terms that can make a drastic difference in your ability to buy the home at the end. For this reason, it’s vital to have an expert look over it. It’s also good to go over your own finances with a fine-toothed comb. Do you have the kind of emergency savings that could cover rent for a while? Is your credit improving steadily? A financial advisor can help you decide if you’re ready to rent to own. To meet the right advisor for you, contact us today.

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