Buying a home is a lifelong dream for most families, but it can be difficult for many people to achieve through traditional methods like mortgages and other financing options. Rent-to-own options have grown in popularity because they often fill that gap and help people buy without a classic mortgage. However, these plans also come with some significant risks that may not be obvious at first glance. Here are ten things you need to know about rent-to-own homes before you sign any leases or contracts.
As the name implies, rent-to-own homes do still involve paying rent to a landlord. The exact terms can vary widely, but in general, you'll be paying fair market rates. You may also pay a little more money each month, which is put towards the home's purchase price. For example, if you rent a house worth $1,000 a month in rent, you may pay $1,250 a month. The $1,000 goes to your landlord, while the $250 is put towards the purchase price.
Some rent-to-own homes don't involve any extra payments each month, but you may be required to pay a large amount upfront as a purchase option. This means that the landlord is obligated to sell the house to you and only to you unless you decide not to buy it. This can be a great way to lock in your dream home if you need time to save up for a down payment or to improve your credit enough to qualify for a mortgage.
Rent-to-own homes do come with significant risks for the buyer. If the situation changes and you can no longer buy the house, you will typically lose all of the money you've paid so far. Unlike a security deposit, the money you pay to option the house is generally not refundable. Most agreements also state that your landlord gets to keep any monthly fees or other money paid towards the purchase price. If you're going to rent-to-own, make sure you have a steady income and solid plan.
In a traditional rental, the landlord is responsible for all repairs and maintenance. However, in rent-to-own situations, that responsibility may fall to the tenant. As a result, it's critical for tenants to have good insurance and a solid savings fund to cover emergency repairs. On the other hand, these agreements tend to give tenants more freedom to remodel and renovate the home, so it can be a great deal for people who are looking for a more customized living space.
Most states have specific laws covering landlord-tenant relationships, but a rent-to-own contract can change that equation. Tenants in this situation may have fewer protections than traditional renters. For example, a common clause stipulates that if you pay rent late, the additional amount you pay that month will not be credited to the purchase price of the home. Be sure to read all agreements carefully.
Even if you're not quite ready to buy, getting pre-approved for a mortgage is a good idea. Since renters do stand to lose all of the extra money they put into the house, it's important to make sure you can realistically afford it before signing the contract and moving in.
So when is renting to own a good decision? If you fall in love with a particular house and think you want to stay in the area but aren't quite sure, that's a good time to consider renting to own (keeping in mind, of course, that you could lose what you paid so far if you change your mind). It can also help you start paying down the purchase price while simultaneously saving up for a down payment.
From the landlord's point of view, renting to own can be quite beneficial. Not only does it ensure a steady income without many of the hassles of traditional renting, but it also helps ensure the tenants are invested in the property and will take good care of it. Landlords also stand to benefit financially if the renter decides not to purchase at the end of the lease term.
The tricky thing about rent-to-own plans is that there is very little standardization, so it's difficult to talk about prices. In general, most options are around three to seven percent of the total purchase price. Monthly rents can also vary significantly depending on the local market. You have the freedom to negotiate whatever prices work best for you, and your potential landlord has the freedom to approve or deny your offer.
Like costs, lease terms vary greatly. However, they are generally considerably longer than your standard residential lease. Most rent-to-own leases last at least three years, which gives the renter enough time to save up money and work out financing to cover the total purchase price. Some leases can be ten years or more.