Rent to Own Homes: Pros and Cons

Buying a house is a great investment. Saving for a home can be time-consuming and may seem out of reach for some potential buyers though. Rent-to-own homes can be a good option for those who need an alternate path to homeownership.

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The traditional homebuying process involves obtaining a mortgage through your bank or a lender and ensuring you have a down payment for a house. However, this may not be a choice for some potential homeowners. You may need more time to grow or improve your credit and save enough money for a down payment and prepaid costs. It can be tricky to rent and save up for a house at the same time. What if you had the option to buy the house you’re renting when the lease is up?

Read about how rent-to-own homes may be a good option if homeownership is out of reach at the moment. We cover how the rent-to-own process works, including the pros and cons. 

What are rent-to-own homes?

Homes that are rent-to-own allow you the option to buy the living space after the lease ends (or obligates you to buy it, depending on the type of contract you sign.) The eventual purchase price and rental time frame are decided upfront. Options often include rent-to-own houses and apartments. 

What are the pros and cons of rent-to-own homes?

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Is a rent-to-own lease a good option for renters looking to buy a house? Let’s review the pros and cons.

Pros:

  • You’ll have more time to boost your credit. When you rent-to-own, you generally don’t have to get a home loan until the end of the lease. This gives you time to raise your credit, which will help you lock in a lower interest rate on your mortgage.

  • Part of the down payment is included in the rent. You’ll most likely pay higher monthly rent for a rent-to-own house, but that is because a percentage of the cost will go toward your eventual down payment. Though you may want to continue saving for a down payment on your own, it may be comforting to know that part of your rent is dedicated to homeownership.

  • It is beneficial for renters and landlords. Working out a rent-to-own agreement is ideal for a landlord who is trying to sell their house. A rent-to-own option allows the tenant to keep their home—or give them the opportunity to keep it—and may save the landlord the headache of finding a qualified buyer. If you are a landlord interested in this type of agreement, read these tips on renting out your home.

  • It can give you a taste of what it’s like to be a homeowner. Some rent-to-own contracts require you to take care of expenses you aren’t used to managing as a renter. Repairs and even property taxes may now be your responsibility—or at least included in the cost of the rent. Ask your landlord if they can purchase rental property home warranty coverage while you’re renting to help with the cost of household repairs or replacements. 

Cons:

  • You may still have to put money down. In many rent-to-own programs, there may be option fees, which are basically a show of good faith for the seller that you’re serious about purchasing the house. Option fees are not as pricey as a down payment, but they can be between one and five percent of the purchase price, according to Investopedia. If you do decide to buy the home, the option fee is rolled into the sale in some cases.

  • Rent is more expensive. You’ll most likely have to pay more than the current market rates for rent. Though the overage is what goes toward the cost of the home, it still means you are paying more out of pocket each month than you would for a traditional rental unit. When you rent a traditional property, you can adjust the amount you put into savings each month; however, that amount is not adjustable with a rent-to-own home.

  • There is little flexibility if you can’t make rent payments or end up not being able to buy. A rent-to-own agreement that requires you to purchase the home at the end of the lease is inflexible. If you miss payments during the lease or can’t obtain a loan or afford the down payment at the end, you may lose the house and be out that money.

Should I lease a rent-to-own home near me?

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Rent-to-own agreements sound great on paper, but there is quite a bit of risk involved if you don’t know what to look out for. First-time homebuyers should review the contract with a fine-tooth comb to ensure there are no surprises. Here are some other ways to protect yourself if you opt for a rent-to-own house:

Get an inspection. This is good advice for any type of property you’re planning to invest in. A home inspector is one of the most valuable tools in your arsenal. They can help you determine the true worth of the home, which gives you the option to negotiate the eventual purchase price. Check out this home inspection checklist for homebuyers.

Perform a property title search. Does the landlord seem trustworthy? Does it seem like the house is in good shape? According to the Federal Trade Commission, rent-to-own agreements are sometimes used by scammers. Before entering a contract, perform a property title search on your potential home to see if anyone has a lien on the home. A property title search can also assure you that the landlord is indeed the owner of the house and that they are caught up on their property taxes. It also alerts you to restrictions regarding building or adding to your property, which can be as important as a home inspection. 

Look for lease options; avoid lease purchases. When available, it’s always best to give yourself an out. Look for rent-to-own home listings with a lease option, which means you are not legally bound to buy the house at the end of the contract. You may not be refunded the amount of your rent that was dedicated to the down payment, but at least you can walk away. However, if you enter into a lease–purchase agreement, it is binding, no matter if you applied for a loan and were denied or if the market crashes and the home is worth considerably less than what you signed for. Hopefully, these scenarios will not happen, but it is a good idea to be informed and plan for any future situation.

Where can I find homes that are rent-to-own near me?

When looking for rent-to-own homes, be sure to vet the website and the listing to ensure that it isn’t a scam. Here are a few ideas for finding houses that are rent-to-own:

  • Check websites that feature rent-to-own programs, like ZeroDown, Dream America, or Divvy.

  • Find a real estate agent who can provide insights into these types of homes and give you ideas for where to find them in your local market. Real estate agents often don’t represent homebuyers looking for rent-to-own houses because their payout may be years in the future. However, getting their professional advice may be helpful.

  • Reach out to a seller on your own. If you have noticed a house listing that has been on the market for a long time, the seller may be open to a rent-to-own option.

Final Thoughts

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Rent-to-own homes can be great alternative solutions to the typical homebuying process. You may be eager to become a homeowner, but remember to make sure your finances are protected when entering into a rent-to-own agreement. 

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AHS assumes no responsibility, and specifically disclaims all liability, for your use of any and all information contained herein.

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