Rent to Own Homes

The PropertyClub Team
Aug 7th 2020
Rent to own homes sound great at first glance, but how exactly do they work, and are they worth it? Here's what you should know about lease to own agreements.

Most people who have considered buying a home have noticed ads about rent to own homes. If you’re like most people, you might be skeptical about what a rent to own home can offer you. You might be curious to know whether it’s legit, how it works, and how to find a good place near you. 

Though the term rent to own has become stigmatized as sketchy by many, the truth is that this can be a potentially smart way to get the home you want—or sell your home to the right buyer. Here’s what everyone should know about this process.

How Does Rent To Own Work?

Rent to own is an agreement with two parts: a lease agreement and a potential ownership agreement. During the first phase of your rent to own agreement, you act as renters on the property. Then, once your rental period has finished, you get to buy the house. 

There are two types of purchase agreements that can be added in a rent to own agreement:

  • Lease-option. A lease-option means that you will get the option to buy the home if you want to. If you don’t want to buy the house or can’t get the financing, you just walk away, and the option expires. 
  • Lease-purchase. A lease-purchase means you will be obligated to buy the property once your lease expires. You can’t walk away from the home with this option.

Is Rent To Own A Scam?

This is a common misconception that has been perpetuated by individuals who just didn’t have their agreements work out for them. A rent to own agreement is not a scam. It’s 100% legal and has the potential to be beneficial for the right person. 

The issue is that renting to own isn’t for everyone. Before you choose to go through this unconventional route, it’s important to read and understand any contract put before you. Moreover, you should also do some research on the home and your potential landlord to prevent fraud. 

Do You Have Any Benefits From A Rent To Own Agreement?

Yes! Renters get to enjoy a lot of perks if they’re in the right situation. Here’s why renting to own can work for you:

  • Part of your rent payments can go towards the principal payment of the house. Usually, this is around 25 percent of your rent. This can lead to a credit of $10,000 or more during the lease period, depending on how long it is.
  • You get to try it before you buy it. A lot of problems won’t make themselves apparent when you just tour a home. Rent to own lets you get used to living there first. 
  • Each agreement is made to work with both the renter and the landlord’s needs. There is no such thing as a cookie-cutter rent to own agreement. Each one is different, so you can negotiate a contract that works with your financial situation and needs. 
  • This allows you to work towards a better credit score and still buy a house. People who have bad credit often prefer to rent to own. 
  • The rent to own agreement locks in the price at signing. If your neighborhood increases in value during your stay, you won’t have to pay the increased price. 

What Are The Pitfalls Of A Rent To Own Agreement?

Rent to own agreements aren’t always easy. You might find yourself in a bad situation if you’re not the right type of buyer for the home. Some of the pitfalls include:

  • You still may need to come up with a down payment for the home. In this case, you may be better off just buying it outright. 
  • If the landlord doesn’t pay the mortgage and the home gets foreclosed, you will be forced to move. Sadly, this is not something that you can prevent as a renter. You need to trust your landlord. 
  • Late payments might not give you credit towards the principal payment on the house. This can lead to a slightly higher price. 
  • Most rent prices are slightly higher than regular market prices. This is to make up for the principal payment credit. 
  • If you walk away from the home, you lose the deposit you put down. There’s no refund here.

What Kind Of Fees Are Involved With Rent To Own Contracts?

A rent to own agreement does have multiple fees that are involved with them. For example, you’ll have to pay for all the typical fees you would have in a regular home sale if you were to buy it, like closing costs. 

You will also have an upfront fee equal to around 1 to 5 percent of the home’s value. This is the “option fee” and pays for the fact that you have an option to buy the home once you’re done leasing.

Who Is Responsible For Maintenance With A Rent To Own Home?

In most rental agreements, the landlord will still be responsible for maintenance and repairs during a rent to own agreement. Once you purchase the house, the responsibility will (obviously) shift to you. 

With that said, there are exceptions to this rule. Make sure to read the contract to ensure that you don’t have to pay for anything.

Is a Rent To Own Home A Good Idea?

Rent to own agreements can be ideal for people who can’t get a traditional loan due to the high down payment requirements, a lack of US credit history, or as a result of very high priced real estate. These agreements give people more leeway when it comes to purchase methods and give people the time they need to sort their lives out. 

With that said, many landlords also benefit from rent to own agreements. They get a nice, steady income until they’re ready to sell. They also know that you will probably treat the property better since you will (hopefully) own it one day. 

How To Find Rent To Own Homes

If you want to check out some rent to own homes near you, then it’s a good idea to do an online search. Most websites that offer lease to own homes that are done through a platform will pop up on the first page. Verbhouse, for example, is a popular option for rent to own programs. 

It’s also possible to find by owner rent to own homes, but that’s going to be trickier. You may need to look at local newspapers, talk to real estate agents near you, and even go on drives to find homes that are being advertised as rent to own. 

How To Stay Safe During A Lease To Own Agreement

Choosing a rent to own situation means that you need to be open to doing a little due diligence. These tips below will make sure that your rent to own agreement serves you well:

  • Read local laws pertaining to rent to own in your area. You need to be aware of your rights and what is allowed to occur in the area you want to do an agreement in. 
  • Keep an eye out for the terms of the contract. Aside from the deadlines on making a decision about the purchase, most agreements also will include stipulations. You may want to look at their pet policy, utility policy, and information about HOA dues. 
  • Research your landlord. If there have been lawsuits or similar issues with him in the past, you might want to rethink your agreement. 
  • Research the property, too. You should never do a rent to own agreement on a property that has liens on it. Should you choose to buy the property, you may be held responsible for the back taxes owed. 
  • Triple-check the contract. What conditions would make you lose the option to buy the house? What happens if you can’t find financing for the house by the time that the lease ends? Who’s in charge of repairs? These little details matter more than you think. 
  • Find out what local laws have to say about your deposit. In some regions, you may be able to get your deposit back if your landlord wants to sell the house to someone else before the home’s lease period is up. 
  • When in doubt about the agreement, ask a lawyer. A rent to own agreement isn’t just a purchase move. It’s a legally-binding agreement. If you have any questions or notice anything confusing about the contract, bring it to a lawyer to review.

Conclusion

If you’re wondering whether rent to own programs are legit, they are. However, they’re still somewhat risky compared to regular home buying processes. Things can go wrong with the landlord and the property, and there are fewer guarantees for renters.

If you choose to go through this route to get a home you want, make sure that you read the contract carefully and understand local laws pertaining to lease to own homes. With this home buying method, it’s smart to look before you leap.