You want your slice of the American Dream, to own your own home, but you can’t come up with a down payment while paying rent somewhere else. Would a rent-to-own property be a good way to accomplish that?
In some cases, but probably not in most. There are details and dangers you have to know about and accommodate or you might wind up worse off than you are now.
These rent-to-own homes, including, lease-to-own and lease purchase arrangements, do get you into the property right away and can be a path to owning it. It’s just not automatic, and there are pitfalls. Here are the advantages and disadvantages:
Advantages of a Rent-to-Own House
Get in now
If you can’t qualify or don’t have the required down payment, this may be a way to get into your own home and eventually own it.
Fix Your Credit to Be Able to Buy a House
If the problem is your credit score, renting for a year or so allows you the opportunity and time to get that straightened so what is preventing you from buying this specific home at this time can go away. That would make it more likely to get the mortgage.
Is This Really Our Place?
When you buy a home and wind up not liking it for some reason – it could be difficult neighbors, a job or commute change, the school system, a lifestyle difference – a lease-to-on deal gives you a perfect “out.” At the end of the lease, you can walk away.
Build Your Down Payment to Buy a Home
Having year or so allows you to save for a down payment, whether you buy that home or not. In some cases, the owner-seller will set aside part of your monthly rent payment into a fund for your down payment.
Keep the Home Purchase Price the Same
If the price of the house that you will buy at the end of the lease is set in concrete, the renter will gain when the market goes up. Then you will know what the price is, and it won’t change.
Disadvantages of a Rent-to-Own House
Those Advantages Aren’t Free
Rent-to-own offers are relatively rare because sellers want to sell and be done with it, and those who want to be landlord don’t sell. To make up for those buyer advantages above, the seller frequently will charge a higher monthly rent than otherwise.
Non-refundable higher payments if you don’t buy the house
When the seller promises to set aside some of your monthly rent for a down payment, the buyer almost always gets that benefit only by buying the house. If the buyer decides not to purchase that house, that accumulated amount stays with the seller. So the buyer winds up paying higher rental cost and doesn’t wind up with the house.
Housing Market fluctuations
While a rent-to-own buyer has the advantage of the increase value in a rising market, they also have the risk of a lower value in a falling market. While it doesn’t happen often, such a buyer could be force into a deal that isn’t the best one available at the time.
Who Fixes What?
Because the assumption is that the renter will become the buyer, these deals sometimes make repairs and maintenance the buyer’s responsibility, which can be expensive. What happens with the HVAC blows up?
Can the Home Buyer Sell the Agreement?
Say you’ve been in this house for a year and now don’t want it for whatever reason, perhaps having nothing to do with the value or utility of the real estate? Can you take advantage of the accumulated down payment amount from the monthly payments and the increased value of the house by selling it to someone else, by having someone else take over your part of the agreement? Generally not, but know that going in.
Two Final Thoughts About Rent to Own Homes
The reason there are so few of these deals out there is that they are fraught with headaches and often don’t work out, sometimes frustrating both the buyer and seller. If you must find yourself in such a deal, have an attorney look at the contract to make sure your protected. For sellers, other Realtors — in Arizona and elsewhere — have told me horror stories about renters who assume the house will be there and make improvements, then get angry and trash the place (or don’t pay rent) when they discover they’re not going to own the house.
You know the old saw about if it looks too good to be true, it probably isn’t. So beware of unscrupulous owners who set these things up to fail, which means a renter pays more monthly rent and doesn’t wind up with the house.
Hal DeKeyser
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