Ever seen or heard an advertisement that claims you can easily buy a home through a rent-to-own program? Some of them make it sound like all you have to do is pay rent for a few years, then boom, you own the house.
But it’s not quite as simple as it may seem, and it’s not the best choice for every situation. If you’re thinking aboutbuying a homeat some point, here’s what you should know about this option.
What is rent-to-own homeownership?
Defined most basically, a rent-to-own agreement is one where you plan to purchase a home after renting it for several years. But there are a few different methods for arranging this.
The two categories of rent-to-own agreements are leaseoptionand leasepurchase.
Lease option:The buyer has the option to purchase the home at the end of the lease term, but is not obligated to do so.
Lease purchase:The buyer must purchase the home at the end of the lease period. If they don’t, the’ll have to pay penalties that are spelled out in the agreement. Those penalties could include forfeiting funds contributed to the down payment.
What are the perks of rent-to-own?
Rent-to-own arrangements can offer a homeownership experience while you prepare for the costs of purchasing your own place.
“For a buyer, it might be that they need to build credit, accumulate time on the job, or save money for the down payment and closing costs,” saidRon Humes, a realtor based in Lexington, Kentucky. “For a seller with property that is more difficult to sell, it may be an option to attract another group of potential buyers.”
Rent-to-own can also help a buyer lock in a price, which can help them better prepare for the financial burden of homeownership. “Renting to own takes years, which gives the buyer the advantage of being able to back out of the purchase if the market takes a downturn, or having a low price locked in if the real estate market increases,” said Beatrice de Jong, consumer trends expert at home sales platformOpendoor.
It can also provide a test period for buyers. “You’ll get firsthand experience at what owning this home will be like, what kind of maintenance it takes and if the layout and size suit your life,” de Jong said.
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Humes explained that in a standard sale, the buyer and seller have limited contact. In a rent-to-own scenario, there’s lots of contact, with the seller serving as the buyer’s landlord for several years. If you decide you don’t like one another for any reason, it could be a tense relationship for a considerable periodof time. In addition, the seller typically has to maintain the property, which can be difficult if that person isn’t used to being a landlord.
And the buyer has lots of time to find issues with the property and demand that the seller-slash-landlord make repairs, Humes said. At the same time, the buyer can’t truly get comfortable in their home by doing renovations or even making simple changes until they complete the purchase, in many cases.
Why does it have a bad rap?
In a sellers’ market, there’s a higher demand for property, so fewer sellers feel they need to resort to a rent-to-own agreement. But a buyers’ market where home sales are slower “is the best time to find sellers desperate enough to entertain rent-to-own options,” Humes said.
In the last recession, some sellers resorted to rent-to-own deals to ensure their homes didn’t sit on the market for months (or years) while they struggled to pay their mortgages. Somegovernment programsalso took over foreclosed properties and provided them on a rent-to-own basis for low-income families.
But the more tangible downside of rent-to-own agreements, beyond the financial stigma of the Great Recession, is dealing with bad actors.
“The deed of the property is not transferred into your name until you fully close on the home,” warned Marina Vaamonde, a real estate investment specialist at sales platformHouseCashin.com. “This can become a problem if for some reason the seller doesn’t pay their taxes or mortgage. The home might go into foreclosure.”
How to make a rent-to-own housing agreement work
“They key to a successful rent-to-own transaction is reasonable expectations and a clearly defined contract from the start,” Humes said.
Get an inspection before the start of the lease period to document existing problems and agree to any repairs the seller must address, Humes recommended.
The contract should clearly define who’s responsible for repairs and maintenance during the lease term.
The contract also needs to specify the amount of the down payment required to purchase the property at the end of the lease term. If money is collected over the course of the lease to go toward that down payment, the collection and return of those funds should be spelled out in the contract.