Considering a Rent-to-Own Home? What You Need to Know

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Own home these days is something that seems further and further out of reach for many Americans. With the housing market on fire since the coronavirus pandemic and prices steadily rising, in addition to more strict mortgage requirements since the 2008 housing crisis, it might feel like you’ll never be able to have a house of your own.

While renting can be fine for a while, many people eventually get the itch for ownership. When you own your own home, you’re making an investment in your future and living on a property that you can improve to your liking.

Many people are intrigued by the notion of a rent-to-own home agreement because it seems like the best of both worlds. If you aren’t able to get financing for a home now, but you’d like to own one in the future, it seems like the perfect way to work towards your goals of ownership.

However, there are definitely some risks associated with going this route. Let’s take a look at what you need to know to ensure that you don’t sign a contract that is predatory, fraudulent, or simply not in your best interest.

Rent-to-Own Home: The Basics

Rent-to-own home contracts are also known as lease-purchase agreements. This is an agreement between a homeowner and a tenant that states that a portion of the monthly rent goes towards purchasing the property in the future.

Once the lease is over, which is typically in one to five years, the credit that you have saved up with the homeowner usually serves as a down payment.

This can be a way for people to start paying towards purchasing a home even when they aren’t able to qualify for a mortgage. However, there can also be additional fees and other risks associated with this type of agreement. For this reason, it’s worth doing your research and reading the fine print before going this route.

Are Rent-to-Own Homes a Good Idea?

Both the seller and the buyer are taking on risks with this type of agreement. If the deal is structured properly, it can make sense. This type of agreement usually arises based on the personal circumstance of both parties rather than a cut-and-dry, cookie-cutter arrangement.

If both parties clearly stand to benefit from the agreement, then it can make sense. However, you need to watch out for instances of predatory rent-to-own contracts.

A Lease-Purchase Option Vs. a Lease-Option Agreement

While these two different types of lease agreements might sound similar, there is a big difference between the two. A lease option is an agreement where you have the opportunity (but not the obligation) to buy the property before the lease ends. A lease-purchase, or rent-to-own contract, binds you legally to buying the house when the lease ends.

Both of these types of contracts come along with risks. However, lease options are the less risky of the two.

With a lease-option, if you decide not to exercise the purchase option you will most likely lose your option money. This is a fee you would have either paid each month with your rent payment or as a lump sum upfront.

With a rent-to-own agreement, it is a part of the contract that you are obligated to purchase the house.

Predatory Rent-to-Own Contracts: What You Need to Know

It is worth understanding that the rent-to-own type of agreement is very vulnerable to shady landlords and scams. While the owner takes on risks to, you are taking on most of the risk as the tenant.

There’s a good chance that you are paying more than necessary toward your rent each month and this type of agreement. You are counting on the owner fulfilling the promise that they will credit an amount of your rent towards the purchase price in the future. You are also responsible for paying for repairs on a house that you are expecting will be your own one day.

If you end up defaulting on your rent payments, the landlord will get to keep the house and all of the extra money that you have paid each month. While many landlords are ethical and simply trying to make a living themselves, others might be scammers.

Some of the fraudulent rent-to-own practices that tenants have gotten caught up in include:

  • There are several years of unpaid property taxes that you are left to deal with after the property becomes yours
  • The house is actually headed for or in foreclosure
  • The landlord does not actually own the house and therefore cannot legally sell it to you
  • The house has hidden issues like asbestos or lead or is in disrepair
  • after a contract is signed promised repairs or fixes aren’t made

If you end up falling victim to one of these predatory practices, it can mean that you’ve been paying money for years that you thought was going towards purchasing a home when that wasn’t the case.

Is a Rent-to-Own Home Right For You?

The bottom line is not you should always do your due diligence if you are considering one of these agreements. While I can work out for both the buyer and the seller, you will definitely want to do your homework before you sign anything.

Did you find this article on rent-to-own home agreements interesting? If so, be sure to check out the rest of our blog for the more fascinating and informative content!

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