Last Updated: November 16, 2021
Are you trying to decide whether to buy or rent a home? Then, why not rent–to–own a home? But how does rent-to-own work? This article addresses how rent-to-own works, its pros and cons, and the possible risks that buyers and sellers need to consider.
What Is Rent-to-Own?
A rent–to–own agreement allows potential buyers to rent a property with the option to purchase it after some period of leasing. These kinds of contracts can benefit buyers and resellers, but you must know the risks involved.
But how does rent-to-own work? These contracts are alternatives to traditional home loans, which are signed as a conventional lease between the landlord and tenant. But with the rent-to-own agreement, the tenants have exclusive rights to buy the property in the future.
|NOTE: 2.3% of US households participated in rent–to–own house transactions, and 4.9% participated in the last 10 years.|
How Does Rent-to-Own Work?
Renting-to-own allows the tenant a chance to buy the home in the future that he is presently renting. The homeowner and potential buyer arrange for the buyer to be presented as a tenant paying monthly rent for a defined period. Each month, a part of that rent—which the buyer pays to the homeowner—goes toward a down payment on the home.
In other words, the tenant pays an upfront fee in exchange for the right to purchase the home at the end of the lease for a predetermined price.
Rent-to-Own Agreement Types
In a rent-to-own agreement, a tenant has two options: a lease option or a lease purchase. These options are similar since both allow the tenant to lease a home for one to three years and then purchase it at the end of the term. But there are some constitutional distinctions between the two.
If the tenant chooses a lease-option agreement, the rent-to-own process includes an option fee to the homeowner when the agreement is signed, which is about two to seven percent of the home’s total price. But this fee isn’t fixed—so the tenant can negotiate with the homeowner.
The rent money that the tenant saves throughout his lease goes toward his down payment if he decides to buy the home. The tenant (buyer) and the seller (homeowner) can agree on a fair price after the lease expires, usually including an appraisal to determine the home’s worth. In most cases, the option fee reduces the purchase price of the property.
With rent-to-own leasing, if the tenant changes his mind and wishes not to buy the home, he can allow the option to expire. But in this case, he’ll forfeit the option fee and rent credit.
The lease-purchase agreement is similar to the lease-option agreement. It allows the tenants to lease-to-own homes for a few years and put a certain percentage of the rent toward a down payment to purchase the property.
When the tenant signs a lease-purchase agreement, they are obligated to purchase the property at the end of the lease. The tenant (buyer) and the homeowner (seller) agree to a purchase price when signing the agreement. They might agree to a price before entering the contract or can specify a date for an appraisal and agree on a price then. After the agreement, the tenant can start the lease.
Setting a price in advance for rent-to-own leasing gives the tenant a better idea of how much money is needed for a loan. A lease-purchase agreement allows the tenant to start shopping for a loan while living in the property.
If the tenant cannot get funding for the property by the end of the lease, they’ll give up claims to the home and the accumulated rent credit. The homeowner can also sue the tenant for breach of contract if he doesn’t buy the property.
Lease Option vs Lease Purchase
When considering the option of the lease-to-own homes, should you choose a lease-purchase agreement or a lease-option agreement? It depends on the real estate market. If property prices are rising in the market, locking down a fee for the home that the tenant wants to buy will build more equity in the house throughout the lease. But if home prices are depreciating or stagnating, the tenant may want to choose an appraisal at the end of the lease. Of course, before deciding, it’s advisable to consult with a local real estate agent.
|Rent–to–own allows potential buyers to rent with the option to buy, which can benefit both buyers and sellers.|
|Rent-to-own contracts are alternatives to traditional home loans.|
|Renting-to-own gives the tenant a chance to buy the home in the future that he is presently renting.|
|A lease-option agreement requires paying an option fee to the homeowner when the agreement is signed. The cost for an option fee is about two to seven percent of the home’s total price.|
|A lease-purchase agreement allows the tenant to rent the home for a few years and put a specific percentage of the rent toward a down payment to purchase the property.|
Pros and Cons of Rent–to–Own
Now, let’s weigh on the pros and cons:
- Purchase with bad credit.
- Lock in a buying price.
- Test before buying.
- Possible forfeit of the money.
- Price of the home may fall.
How to Find Rent–to–Own Homes
If you wish to buy a home but have some financial hurdles—such as bad credit keeping you from getting a traditional mortgage—a rent-to-own house is a suitable choice. Consider these three ways (below) that can help you find the right rent-to-own property.
Hire an Experienced Real Estate Agent
One of the best things you can do is hire a well-educated agent experienced in lease-purchase transactions. The agent can set you up with multiple listing services (MLS) that provide properties that fit your needs. Such agents also have experience negotiating a lease-purchase agreement, which is not the same as a standard sale agreement.
Real estate lead generation companies can provide needful rent-to-own home information. Making well-educated decisions is essential, and so having a professional on your side is always a benefit. It helps you not only with the rent payments and lease period but also with the option fee. Another wise option is to hire a tenant screening service.
Browse Rent-to-Own Websites
Rent-to-own home websites also provide rent-to-own information to help narrow your search of homes by county and state. Some of those websites include Foreclosure, and Trulia.
Contact Sellers of Lingering Homes
Another option on how to find rent-to-own homes is to contact sellers or landlords who have had properties on the market for a long time. Perhaps sellers are now keen on renting-to-own such properties.
|NOTE: Rent–to–own is an $8.5 billion industry serving 4.8 million customers per year.|
Is rent–to–own a good idea? It offers a unique opportunity for aspiring home buyers. But it also has potential risks. If you decide to go with a rent-to-own property, you need to be aware of the risks mentioned above. Ultimately, it always depends on what kind of situation you are in.
Yes. It’s a deal in which you commit to leasing a home for some period, with the possibility of purchasing it before the rental period ends.
You need to sign a rental agreement and a document that defines how you plan to purchase the property, including a lease option or a Lease-purchase agreement.
How does rent-to-own work? It allows potential buyers to rent the property for a specific period before buying it.