Rent to Own Homes: an Option to Consider?

• Author: Chris Remington
• Posted: 2023-12-15

“Rent-to-own” is a popular term that is intriguing to many. It can be an agreement between owner and seller to rent or lease a property until it is paid in full. The plan can work several different ways, which is why the term is often all encompassing. Still, many people look for these key words when looking to buy a place without the bank’s assistance. Seller financing has its perks. It's important that you spend time understanding the goods and the bads of rent to own before trying it. Foremost, don't ever pay for a service that promises to find you a rent to home listing.

Understanding A Rent-To-Own Situation

A typical rent-to-own scenario allows tenants to rent a home for a specific period of time, usually a year. When this term is over, they have the option to purchase the home. All or a portion of the amount of money paid to rent is credited toward the sales price of the home. Some may offer a credit on closing costs too. Each situation is different.

A predetermined price is written into the agreement. Most landlords will require around three percent down for this kind of deal. The tenant is bound to the purchase price agreed upon at the end of the lease’s term. Consequently, the property owner cannot sell the property to anyone else while in agreement with the tenants.

Why These Arrangements Are So Attractive

Those who have bad, poor or no credit often look to these options as a way to own a home. Additionally, those who don’t have the money for a 20 percent down payment also see the charm in these types of scenarios. Getting a traditional mortgage is becoming increasingly difficult. If a person has experienced a foreclosure or slow payments on a mortgage, then the bank will likely say no to another mortgage for about 7-10 years.

Rent-to-own agreements can be both positive and negative. For some, it is the perfect way to get into a highly-desired neighborhood. Some areas with great school districts or close proximity to the downtown area may have less to choose from on the housing market. Some look at it as a way to own a home without being stuck in a 30-year mortgage.

The Pros and Cons of Renting To Own

From 1990 to the present, the city of San Diego, California, had more than 609,000 sales. Of those sales, only 782 were a lease option contract. These agreements are often filed in court for validity. The San Diego Association of Realtors knows about these agreements all too well. They also know about the pros and cons.

The main benefit to the buyer is that they can lock in a sales price on a great home. They can live in the home for an extended period and then make their decision. Some people move into a home and hate the neighborhood, neighbors, or the home itself. If you are signed into a 30-year mortgage, you can’t just move. However, if you are under a rent-to-own contract, then you can leave when the term is expired.

On the downside, the monthly rental payment will probably be a bit higher than usual. The convenience of the arrangement has a cost. The reason for the higher payment is that some of the money is going towards the purchase price. Unfortunately, the extra money will be forfeited if the deal is canceled. Oftentimes, in these agreements, the tenants are responsible for paying for maintenance, back taxes, and any upgrades. Under a “land contract” agreement, which is filed in the courts, things are a bit more difficult. If the renters don't pay their payment, it doesn’t just mean an eviction, but it also means a foreclosure on their record.

Do These Rent-To-Own Deals Make Sense?

A priest in Yonkers, New York, told the local newspaper how this arrangement worked for him. After he had a heart attack, he was forced to retire. He signed a rent-to-own agreement with no extra fees and the option to buy after a year. The term stated that he must put down 10 percent. The rent was used to credit five percent on his down payment. For him, the situation worked out in his favor.

In general, most real estate executives don’t think that it makes good sense to have this type of arrangement. Those who have good discipline on their finances don’t need special deals like this. They can afford to go out and buy the home they want. Some realtors say it is a big risk for both buyer and seller. If an agreement with special arrangements needs to be made, most suggest doing a lease with an option. When the end of the term comes, if they don’t have the money to pursue a mortgage, they can continue renting and living in the home. Rent-to-own agreements may work for some, but for most, it is a big headache.