So let’s say this sounds like your situation — and you like the idea of rent-to-own. But you aren’t sure whether a program exists to help you get your foot in the door — or even how to find a rent-to-own home that works for you.

Well, here’s some good news: there are multiple rent-to-own programs and lease to own options that exist to help you get into that home, and even help you find it, too! We examined a range of programs for you to explore and consulted an experienced agent to help you understand what’s available and whether it’d be a good fit for you. But what is rent to own, and how does rent to own work? These companies help you out and answer the question, “Is rent to own a good idea?”

Step one: Talk to an expert

Connect with a top-rated local real estate agent who can help you navigate rent-to-own options near you.

Get Started

Home Partners

Through the Home Partners program, prospective rent-to-own homebuyers start by filling out a pre-qualification application. If approved, they move to submit a full application. This step includes a credit and background check, income verification documents, and requires an application fee.

Buyers will need to meet Home Partners’ minimum FICO requirement, which varies by market, and a maximum debt-to-income ratio (DTI) of 50% to be approved.

Once approved, Home Partners lets buyers know what their maximum allowable monthly rent will be. Then the home seeker works with licensed real estate agents of their choice to find the right home for them.

“Home Partners is affiliated with various brokerages and can get them connected to a Realtor®. I happen to be on their list,” explains Ellen Williams, a top-selling agent who works with 66% more single-family homes than the average agent in Joliet, Illinois. “So after they are approved, I call the client, and we talk about the process, and we go shopping and look for a house they like.”

You can either search for homes on the program’s website or choose from a wide variety of properties in communities that Home Partners serves — as long as they fit the program’s investment criteria and your budget as the home-seeker. These are the criteria for properties within Home Partners’ parameters:

• Homes must be located in approved communities around the country.
• Properties must fall into the categories of single-family homes and fee-simple townhomes.
• They must be traditional sales or for sale by owner (FSBO) homes.
• Homes must be listed at a price point between $100,000 and a metro’s designated maximum purchase price (which Home Partners sets).
• The home must have two or more above-grade bedrooms on a lot of two acres or less.

“Home Partners doesn’t really want to purchase homes that back up to big tension wires, or homes that might be difficult for them to sell in the future,” Williams notes based on her experience working with the program.

Once you find a home you love within the criteria, your agent submits it to Home Partners to review. Next, Home Partners makes an offer to the seller. If the seller accepts, Home Partners buys the home. Prospective residents then must sign a one-year lease for the home as well as a “right to purchase” agreement, similar to a lease purchase option agreement, that gives you the right to buy it later if you want to.

Home Partners property management company, Pathlight Property Management, prepares it for tenants to move in. Residents have the option to purchase the home at any time during the lease. If you do not renew the lease and don’t choose to the ‘rent to buy homes’ option, you can then move out without penalty.

Divvy

The Divvy program is best suited for move-in-ready, single-family homes. It doesn’t purchase fixer-uppers or properties like condos or mobile homes.

The program has set minimum and maximum home prices in each metro area; these range between $60,000 and $550,000. “These help us ensure the homes we buy are move-in-ready while giving our customers the best chance of buying their homes back at the end of their lease,” Divvy Homes co-founder and C.E.O. Adena Hefets told HomeLight.

Would-be Divvy participants apply for the program and get underwritten for a home budget. Divvy requires a minimum FICO score of 550. Buyers then work with a local real estate agent to find a home that meets their needs within that budget. Divvy purchases the home in cash, and the home seeker puts down between 1% and 2% of the purchase price as an initial home savings contribution, similar to a down payment. (In rent-to-own scenarios, this is known as an “option fee.”)

During their three-year lease, about 25% of each monthly payment goes toward the program participant’s home savings, building to between 3% and 10% of the home’s purchase price — enough for a mortgage down payment.

The tenant is able to buy the home at any point during their lease with no penalty or fee. If the program participant chooses not to buy their home, Divvy will return their home savings, minus a relisting fee (2% of the home’s original purchase price).

Dream America

Dream America accepts applicants who have the income and funds needed for an FHA or VA loan, but who can’t qualify because low FICO scores or other issues make it too challenging to get a mortgage. With this program, the minimum credit score is 500, with a 50% maximum DTI.

Dream America operates in Atlanta, Dallas, Jacksonville, Orlando, San Antonio, and Tampa. Approved participants in the program can pick any house available for sale in these communities within their budget at a price of $150,000 or higher.

Dream America buys the home and leases it to the home seeker for 12 months. At any time that the participant qualifies for a mortgage, they can cancel the lease with no penalty and buy the home. Dream America credits 10% of rent paid toward the home purchase.

Program participants pay an onboarding fee of 1% of the home price as soon as Dream America is under contract to buy the home.

If the renter still needs more time at the end of a 12-month lease, they can renew for another year as long as they have been paying their rent on time each month and follow the rent to own contract.

Local and regional programs

Williams advises that there may be an array of additional programs available to would-be rent-to-owners in their local areas. She suggests searching online to identify potential local programs — and even keeping eyes peeled for billboards or other print advertisements.

If you pair up with a national, regional, or local program that suits your needs, you might just find that rent to own homes might be on your ideal path to homeownership!

Header Image Source: (Aubrey Odom / Unsplash)

It’s not surprising that so many buyers are curious about rent-to-own agreements, where they rent a house they intend to buy (eventually), and a portion of their monthly rent goes toward that down payment goal.

Rent-to-own in real estate can be risky; there are plenty of scams out there, and buyers need to be careful to ensure that any contracts they sign give them an opportunity to bow out of the agreement if red flags start waving.

But despite the risks, many buyers end up finding (and purchasing) their dream home through a rent-to-own plan. It’s a viable way to buy a house, and in 2023, there are plenty of options for buyers who want to rent-to-own.

We’ve collected all of our rent-to-own knowledge in one ultimate guide to answer all your questions about rent-to-own, including the risks and rewards, how to find rent-to-own homes, contract components, and more. (One big upfront tip: Working with a top agent can help you avoid pitfalls and protect your future.)

Let’s dive right in!

Why rent to own?

A rent-to-own real estate deal might work nicely for some, but it’s not for everybody; there are more risks involved than with a financed real estate purchase, which is why most buyers choose to get a mortgage instead of renting-to-own a house.

That said, rent-to-own homes can be a good fit for certain buyers. Here are some of the reasons why you might want to rent-to-own.

You need to build or improve your credit

One of the biggest reasons why some people choose to rent-to-own a house is because they need time to build or improve their credit scores before they can qualify for a mortgage loan. Buyers can apply for an FHA loan with credit scores as low as 580, but they will get better rates if they have higher credit scores; a conventional loan requires a credit score of at least 620 to qualify.

A rent-to-own home allows you to move into the house you want to buy today, focus on your credit, and then purchase the house later, after your credit is in good enough shape to get a mortgage loan that will work for your budget and household.

You need to build your work history

If you just moved to the country, or you just entered the workforce, then you might not have a deep enough work history to qualify for a mortgage loan. Typically, lenders will want to see at least two years in the same career (and preferably at the same company), so if you’re embarking on a brand-new career path, it might be more difficult to qualify for a loan temporarily.

Maybe you don’t want to wait until you’ve got two years of work history under your belt to start shopping for a house to buy, in which case, a rent-to-own home might work nicely for your situation.

You need to save money

Buying a house is expensive! You’ll need to have a down payment for most mortgage loans, with minimums of anywhere between 3% of the home’s purchase price for a conventional loan, to 3.5% for an FHA loan. And you’ll have to pay for closing costs, which can range anywhere between 2% and 5% of the loan amount for homebuyers.

Depending on what the real estate market looks like in your area, saving up a 20% down payment might not be realistic, and you might want to consider getting a loan that has mortgage insurance (MI), which will include an extra MI premium charge that you’ll pay every month. If you can save up 20% of a home’s purchase price, you can avoid MI; there are also some localized loan programs that will let you put down less than 20% and avoid MI.

Bottom line: The more you can save, the better off you’ll be when the time comes to buy your house. You’ll have more options in the event of a low appraisal, and you (hopefully) can avoid closing cost sticker shock when you see your Closing Disclosure.

With a rent-to-own home, you can move into your chosen house immediately and live there while you save to buy it.

You’re trying to pay off debt

Lenders are going to want to see a debt-to-income ratio (DTI) that shows you will be able to afford the mortgage loan payments on your house. Ideally, you should not be spending more than one-third of your take-home income on your mortgage expenses — though depending on your income, some lenders will allow higher DTIs up to 50% for certain buyers.

If you’re carrying a lot of debt, paying it down can help improve your credit score as well as give you a decent amount of leeway when it comes to DTI. That could be the difference between getting a mortgage loan or continuing to rent for another few years!

When you rent-to-own your house while you’re paying off debt, you only have to move your belongings once, and you’re on a path to homeownership even while you tackle student loans, credit cards, car loans, or other debts or obligations.

You found your dream house and are ready to move in immediately

Sometimes you know exactly what is going to work for your family and your situation, but you’re not quite in the position to buy it. Instead of buying a transition home or starter home, some buyers might opt to skip that step and move into their ideal house today.

A rent-to-own home will allow a first-time homebuyer, or another buyer who can’t quite afford to buy their dream home today, to move into it anyway — then get themselves into solid financial shape to buy it with a mortgage in a year or three.

You already know and trust the seller

Some rent-to-own deals take place between close friends or family members. In these situations, the buyer is likely already familiar with the house, there’s a history of trust between both the buyer and the seller — and the buyer could use some time to prepare to buy the house with a mortgage loan.

If a close friend or family member is offering an opportunity to buy a house that’s currently out of the buyer’s affordability range — but won’t be forever — then renting-to-own the house in the interim can be one way to get into the homeownership door that much faster.

You want to start making yourself at home somewhere

Moving is nobody’s idea of a good time, and there are plenty of reasons why it makes sense to avoid doing it multiple times. When you have kids or pets, getting them acclimated to a new space and even slightly new routines can be a big deal, not to mention your own settling in. It takes time to learn where the best coffeeshop is for your needs, or the easiest place to walk your pup!

With a rent-to-own home, you can move in just once, and you won’t have to change a thing after you get a mortgage loan because you (and everyone else in your household) will already be acclimated to the area and this particular home.

How do rent-to-own homes work?

Like the name suggests, the process of renting-to-own a house contains two separate processes: renting the house, then owning (or buying) the house after the rental period has expired.

• The buyer will pay rent to the seller/landlord while they are renting the house; after the rental term is over, the buyer will apply for a mortgage loan to purchase the house and enter into a typical home sale purchase agreement with the seller/landlord.
• Typical rent-to-own term lengths are anywhere between one and three years.
• The sales price of the home will be set in the rental contract.
• The buyer will typically pay an option fee when they move in, plus some additional amount in rent each month; these fees can be applied to the buyer’s down payment (that said, it’s quite typical for the seller/landlord to keep the option fee).
• The contract will stipulate who is responsible for which home maintenance areas or projects while the buyer is renting the home.

Types of rent-to-own agreements: Lease option vs. lease purchase

There are two standard types of rent-to-own agreements that buyers are likely to encounter. In any rent-to-own contract, the buyer agrees to rent the home for a specified period of time. What happens after that time is up? It depends on whether your rent-to-own agreement was a lease option agreement, or a lease purchase agreement.

With a lease purchase agreement, the buyer is committing to purchasing the house when the rental period has expired. If they decide not to buy the house, or they can’t qualify for a mortgage, they could lose any money they’ve sunk into the opportunity, and the seller could decide to sue for breach of contract. That’s about as bad as worst-case scenarios get!

A lease option agreement gives the buyer the first exclusive option to buy the house when the rental period is over. If the buyer decides they don’t want to move forward with the sale, or they can’t qualify for a mortgage loan, they can walk away with no legal penalties. (Whether they also get to keep any money reserved for a down payment will depend on the rent-to-own contract.)

What does the rent-to-own process typically look like?

The timeline and process for renting-to-own a house can vary depending on your specific circumstances, but generally speaking, you can expect to follow these steps.

1. Educate yourself about the market

Before you try to rent a house that you’ll eventually purchase, you’ll want to brush up on what’s reasonable in your market so that you can be sure you’re making a fair offer to the seller (and being fair to yourself, too!).

Ideally, you’ll learn about these variables in your specific market — the more granular you can get in terms of city, ZIP code, and neighborhood, the better!

• How much does it cost to buy a house? What’s the price per square foot? What’s the median sales price in the area?
• How much does it cost to rent a house? What’s the rent price per square foot? What does median rent look like?
• What have home prices been doing historically in this area? Are homes appreciating quickly or slowly, especially compared to the national market or surrounding areas?
• What are the most common maintenance issues that homeowners deal with in this area?
• What does your own financial situation look like? What is your credit score? How much do you have stashed away in savings? What is your debt load? How much income do you earn?

Additionally, it’s smart to do some research on the seller. If they have any pending lawsuits against them — especially for some kind of rent-to-own situation — that’s something you’ll want to know before you sign a contract with them!

2. Find an agent

Do you really need an agent when you’re renting a house with the intention to buy it later on? It depends on your market and your personal situation, of course, but a real estate agent is an advocate for you as a buyer, and their job is to help protect your interests.

If you don’t work with a real estate agent on this home transaction, you should strongly consider hiring a real estate lawyer who can review the contract for you and help you understand exactly what you’re agreeing to and the risks in the contract for you as the buyer.

3. Find a house

After you have a sense for your budget and how much you could potentially spend on rent, it’s time to start looking for a house to rent (and eventually, to own).

Finding a rent-to-own home isn’t always easy. Many of the homes that are advertised overtly as rent-to-own could be tied to a scam; even if the offer is legitimate, not every seller is willing to help buyers protect themselves by agreeing to a lease option agreement instead of a lease purchase agreement, just to name one example.

Your real estate agent will be an amazing source for finding rent-to-own homes; we’ve also listed a few more options for where to look for these homes a little further below.

4. Make an offer and negotiate with the seller

Making an offer on a rent-to-own house isn’t quite the same thing as making an offer on a house to purchase it, although there are similarities.

Instead of an offer letter, you’ll submit a rent-to-own proposal to the current homeowner. The proposal will include the term length (how long you’ll rent the house before buying it), the final sales price, and other details about the arrangement.

The seller might agree to everything you’ve outlined in the proposal, or they might have their own suggestions about what they’d prefer. At this point, you’ll negotiate the details with the seller until everyone is satisfied with the outcome.

Don’t sign anything just yet; you’ll need more information before you make this a binding deal.

5. Get an inspection

You should always get an inspection before you buy a house, whether you’re renting-to-own or purchasing the home right away.

An inspection gives you an official rundown of every discernable issue that could be affecting the house. Even if you know you’re going to want to buy the house no matter what the inspection finds, you should still get an inspection so that you fully understand exactly what you’ll need to repair after you move in.

With rent-to-own, the best time to inspect the house is before you move in as the renter. That way you have a clear understanding of any maintenance problems the house might be carrying, which will help when it comes to finalizing any contract conditions.

After you’ve been living in the house for a year or three and are ready to buy it, you can decide whether to get an inspection or skip it during the actual purchase process. But you should absolutely get an inspection on the house before you move in as a renter, which will at least give you an official record of any problems with the home that existed prior to you living in it.

6. Get an appraisal

You’ll likely be required to get an appraisal before you can secure a mortgage loan to buy the house. So what’s the point of getting an appraisal before you move in?

An appraisal is an impartial third party’s assessment of a home’s value, executed by a trained appraiser. Without one, you won’t know for sure whether the seller is inflating the value of the house you’re hoping to buy, or whether you’re getting a steal.

Point of fact: You won’t know whether you’re overpaying or underpaying (or right on the nose) for sure until the time arrives to buy — nobody can predict exactly what’s going to happen in the real estate market. But getting an appraisal before you move into the house can give you a sense for whether the future agreed-upon price for the home is reasonable or wildly out of bounds.

7. Get a title review

The title review is another step that typically happens during closing when you buy a house, but you’ll want to tackle it before you move in with a rent-to-own agreement.

This step can help protect you from scams. Does the seller truly have the right to sell you the house? Are there any tax liens or other problems with the home’s title? Ordering a title review can answer these questions and help you dodge a potential rent-to-own bullet.

8. Negotiate price and terms again, if needed

After you’ve gotten an inspection, appraisal, and title review, the information you gathered during this process could change your mind about the rent-to-own home and whether you want to go through with this deal.

If you’re feeling like the price isn’t fair, or you want to renegotiate the term length or the conditions, this is the time to do it.

9. Pay the option fee

A rent-to-own option fee is a standard charge that renters pay to the seller/landlord, which reserves them the first opportunity (or option) to purchase the house when the seller eventually lists it. The option fee is typically set as a percentage of the eventual purchase price of the home and can range between 1% and 7% of the purchase price.

The option fee will usually be applied toward the buyer’s down payment when the time comes to buy the house, and the amount of the option fee is typically negotiable, although it might not be refundable to you if you decide not to buy the house.

In other words, if you are given the first option to buy the house and you say “no, thank you,” then the seller can typically keep your option fee — they’ve provided the service you paid them for by offering you the house first.

10. Move in

At this point, everything should be set up for you to move yourself and your household into your new home.

Before you move in, make sure to document the condition of the home, just like you would as a regular renter. You’ll want to be able to confirm everything from the state of home’s cosmetic appearance, to its systems, appliances, and other major components.

11. Work on your finances

One big reason why people typically opt for rent-to-own homeownership as opposed to buying a house immediately is because they can’t afford to buy a house. Down payments might be out of reach, or you may need to improve your credit before you can qualify for a mortgage loan.

With a rent-to-own home, you can live in the home you plan to buy today, while you save up the money to buy it (and polish up your credit score) for tomorrow’s transaction. So you’ll have the rental term (the one to three years you’ll be living in the home) to work on saving a nest egg, paying off your debt, and ensuring that you’re setting yourself up for success when the rental term ends.

While you can start saving for a down payment anytime, it takes about six months to start showing significant improvement on your credit score. Don’t sleep on it!

12. Apply for a mortgage loan

After your rental term has expired, you may have the option to extend the rent-to-own agreement by another six months to a year — or it might be time to go ahead and buy this house.

If the latter is the case, you’ll want to apply for a mortgage loan with several lenders. Collectively, all the loan applications will reflect only one “hard” pull on your credit report, and by applying for loans with several different lenders, you’ll be able to see clearly which one is giving you the best deal.

Some might offer fewer upfront fees, but charge more in mortgage interest; the Loan Estimate that you’ll receive from each lender should help you compare apples to apples and decide which loan and lender is going to be the best fit for you.

13. House goes under contract

Although you’ve had a real estate contract regarding this home for several years at this point, now is when the house will officially go “under contract” — meaning that you and the seller are actively working on transferring ownership from them to you — and you’ll start winding your way toward the closing table.

14. Get an(other) inspection (maybe)

You may decide at this stage to get another inspection. This is entirely up to you as the buyer, although you have now been living in the house for at least a year (and possibly more). Theoretically, you should have a pretty good sense for what’s working well in the house and what might need to be improved or replaced — especially if you got an inspection before you moved in.

This would also be the appropriate window of time to get any specialty inspections, such as inspections for the roof, foundation, septic system, radon, a pest inspection, or any number of other granular assessments of the home’s condition.

15. Get an appraisal

Unlike the inspection, if you’re getting a mortgage loan, an appraisal is going to be required by your lender. Mortgage lenders won’t loan you more money than a house is worth, and an appraisal is the best way for a lender to confirm a home’s value.

Be prepared for some possible snags at this stage in the process. If you set the sales price a year or three ago, then it might not accurately reflect the current market. The appraisal could come in high, meaning the home is worth more than you’re paying for it (good news for you as the buyer). Or the appraisal could come in low, which means that the home is not worth as much as you’re going to pay for it.

A low appraisal will require either more money, a renegotiation in price, or some other solution in order to move forward with the sale — sometimes appealing the appraisal is the best bet.

This is one reason why it’s smart to work with a qualified real estate agent, who can give you advice about the purchase price when you sign the rent-to-own agreement as well as help you renegotiate with the seller if an appraisal is low.

16. Don’t forget about closing costs!

Closing costs are the fees you pay to your title and escrow companies, your mortgage lender, and other parties involved in the closing process. Your closing costs will vary depending on the mortgage loan you’re getting, but you can typically expect closing costs to range from between 2% and 5% of your total loan amount.

That means you’ll need to have a few thousand dollars earmarked for closing costs. Sometimes these can be wrapped into your mortgage loan, but you don’t want to learn at the closing table that you need to provide more money than you have available! Talk to your agent and triple-check your Loan Estimate and Closing Disclosure so you know what to bring to the table.

You’ll typically pay your closing costs through a wire transfer or a cashier’s check; ask your agent what to expect there, too, so you can get the check ready before closing, or arrange for the wire funds transfer.

17. Closing: Happy homeownership!

After all this, you’re finally ready to call yourself a homeowner. You’ll sit down and sign the legal and mortgage documents at closing, the deed will be transferred from the seller to you, and … that’s it!

If you were buying the house in a standard transaction, this is probably when you’d get the keys — but since you’ve been living there for a few years, presumably you can let yourself inside. That said, this would be a smart time to consider changing the locks; that way you won’t need to concern yourself with any stray keys that still might fit your door lock.

Rent-to-own home contracts

A contract for a rent-to-own deal is a bit of a hybrid between a lease agreement (otherwise known as a rental agreement) and a purchase agreement. And it’s also a bit of its own kind of unique animal.

When you’re putting together and signing a rent-to-own contract, here are some of the standard variables you can expect to see.

Components of a rent-to-own contract

Lease option vs. lease purchase

As noted above, rent-to-own agreements come in two basic flavors, a lease option agreement or a lease purchase agreement. The lease option agreement gives you the option to buy the house after renting it, whereas a lease purchase agreement legally obligates you to buy the house.

Most buyer advocates will warn you to stay away from lease purchase agreements. If you are completely, absolutely, 100% certain that you will be able to qualify for a mortgage and buy the house when the rent-to-own term expires, then a lease purchase agreement isn’t a big risk.

But most of us don’t have that level of certainty about the future, especially when it comes to big financial purchases; if there’s any doubt whatsoever in your mind about what the future holds for you, then you should opt for a lease option agreement.

Term

The contract term states how long the agreement is valid. Will you rent the house for one year, two years, three years before buying it? Eighteen months? It’s up to you and the seller!

Make sure the term is long enough that you’ll be able to accomplish any financial goals (like saving for a down payment or improving your credit) during that timeframe.

Home purchase price

Even though you’re signing the contract a year or even several years before you buy the house, the rent-to-own agreement will likely contain the final purchase price of the home.

This means you’re going to have to do some projecting into the future to determine what home prices are likely to do. You can get a sense for what the future holds by doing some research into the past: How much have home prices appreciated in this area? How much has this specific home appreciated year-over-year?

The idea is to set a future home purchase price that more or less aligns with where the market will be when you’re ready to buy. So you can expect the home to be priced higher than it would be today in order to accommodate future price growth.

Option fee

The contract will stipulate both the amount of your option fee as well as where the fee will be applied (or who gets it) depending on different contract outcomes. An option fee is usually set based on the sales price of the home and can range between 1% and 7% of the price.

Typically, your option fee will be applied to your down payment when you buy the house. If you decide not to buy the house, it’s also typical for the seller to keep the option fee.

Rent amount

Your rent-to-own contract will stipulate the amount in monthly rent that you will pay the seller. In most rent-to-own contracts, the monthly rent charged is higher than the average market rent in the area; some of that additional rent money will be applied to your down payment if you buy the house.

The contract should detail how much in rent will be considered a “rent credit” for your down payment, as well as what will happen to that rent credit if you can’t (or don’t want to) buy the house later. Sometimes the seller keeps rent credit money, but sometimes it is remitted to you as the buyer if you decide to walk away.

Renewal clause

Life is full of unexpected twists, and there’s always the possibility that you’ll need more time than you think to save up for a down payment and closing costs, to improve your credit score — to prepare for homeownership.

A renewal clause states whether the contract can be renewed, for how long (six months to a year are standard terms), and sets a new sales price for the house.

Maintenance responsibilities

Unlike a typical lease agreement, when you’re renting to own, the seller is likely to put the onus of responsibility for home maintenance and upkeep on you — but the contract should stipulate who’s in charge of what part of the home. Asking you to replace the roof as a renter is probably not a fair request.

However, requiring you to fix any cosmetic issues, maintain the yard, and make minor repairs to the home (below a certain dollar threshold) is reasonable and typical in many rent-to-own contracts. Think of it this way: You’ll get a front-row seat to any issues your house might contain!

Taxes, HOA dues, and other fees

While you’re renting the house, someone is going to have to pay taxes, homeowners insurance, homeowners association (HOA) dues, and other possible fees and expenses that come with homeownership.

Your seller-slash-landlord should be taking care of the homeowners insurance, as they’re the entity who still owns the house. Consider renter’s insurance to cover your belongings in the event of a disaster (or a misfortune, like theft).

Taxes and HOA dues are more negotiable, and the seller may ask you to pay for those items while you reside in the house. Before you agree, make sure you understand how much those fees are; taxes and HOA dues can vary depending on where you live and the amenities provided by your HOA.

Rent-to-own contract advice

A rent-to-own contract is a legally binding agreement, so you’ll want to make sure you fully understand each and every component before you sign it.

Consider hiring a lawyer to read over your contract and advise you about any changes you might want to make or protections you might want to add. Your real estate agent can also advise you as to whether the contract is fair for you, but a lawyer (especially one who specializes in rent-to-own) will be familiar with all of the possible loopholes and problems — and savvy about rent-to-own scams, to boot.

You might also think about requesting some sort of service component in the contract. For example, can you split the cost of a warranty that covers your home’s systems and appliances while you’re renting? This way you’ll only have to pay the deductible for any major repairs or appliance replacements that might emerge during your rental term.

Rent-to-own home pros and cons

As you’re no doubt learning, renting-to-own is a complicated way to buy a house! Why do people want to do it? What’s the benefit for sellers to offer this option for buyers? And what are some of the reasons why you might want to avoid a rent-to-own deal?

Let’s walk through the pros and cons.

Rent-to-own pros for buyers

When you aren’t quite ready to buy a house (but will be in the near-ish future), these are a few of the reasons why you might consider renting-to-own instead of just renting for now, and then working on the “owning” part in a couple of years.

You can improve your credit

As we mentioned earlier, your credit score is an important variable when it comes to getting a mortgage loan. Your credit score is an indication of how well you repay debt, and lenders often will have minimum credit score requirements for different loan types.

If your credit score is lower than 580 for an FHA loan or 620 for a conventional loan, then renting-to-own can allow you to move into your eventual home today while you improve your credit score. It takes about six months to start seeing changes to your credit score, and if you’re renting-to-own, you can enjoy your future house today, all while your credit slowly improves.

You can save up more money

Some buyers are going to have better luck than others saving up a full 20% down payment for a house (and it depends on the market, too). That said, anybody who rents-to-own is going to have at least one year, if not a handful of years, to get ever closer to that magical 20% down payment amount.

Because the sales price of the house is set when you sign the rental agreement, you’ll also know exactly how far you have yet to go to reach 20%, or 10%, or whatever your ultimate down payment savings goal is. And you can chip away at that down payment while enjoying the house you’ll buy!

You can build a deeper job history

In addition to your credit score, lenders are going to evaluate your work history when you apply for a mortgage loan. They typically want to see that you’ve been working in the same field or career path, if not at the same company, for at least a couple of years.

If you’ve been in the workforce for some time, this might not even warrant a blip on your radar — but if you’re a new graduate who is only recently entering the workforce officially, then your previous job history likely does not reflect the future. And if you’re immigrating with a job lined up, then you won’t have any previous job history in the United States to lean on when buying a house.

A rent-to-own home can give you the time you need to create or build the required job history to secure a mortgage, and you’ll already be living in the home you intend to buy.

You can lower your debt

Remember when we mentioned DTI earlier? DTI, or your debt-to-income ratio, is typically expressed as a percentage, showing how much of your take-home income you spend each month on debt, and how much is left for additional expenses. Debt could encompass student loans, car loans, credit card payments, alimony or child support, and more.

The less debt you carry, the better your DTI for buying a house. Lenders prefer lower DTIs, and you should ideally be spending no more than one-quarter to one-third of your take-home income on your housing payment, and have no more than 45% total DTI for most conventional mortgage loans.

You can test-drive the house

Sometimes, a buyer might decide to rent-to-own a house because they know it’s their dream abode — but other times, they might not be so sure!

Buying a house is a years-long commitment, and if you aren’t quite certain that this floorplan or location is the best fit for you, then renting-to-own can at least help you get your foot in the door (pun intended) and give you a chance to see what it’s like before you commit.

You might pay less than market value for the house

With a rent-to-own contract, the future sales price of the house is typically decided when the buyer and seller sign the lease purchase or lease option agreement. This is beneficial for both parties — both the buyer and seller know what the house will cost, giving the buyer the opportunity to target a specific amount to save, and the seller peace of mind knowing what their eventual sales price will be.

If you happened to underestimate how much home prices will grow in your area for the next two years — a difficult thing for even experts to pinpoint — then it’s quite possible that you could be buying the house in a year or two for less than its market value. That means instant equity in the home, and a better deal for you as the buyer.

It’s a forced savings plan

A rent-to-own contract will typically not only require you to pay an option fee, which might get applied to your down payment, but it will also ask you to pay more than the market rent in your area. That additional money will go toward your down payment when the time comes to sell.

But while you’re paying rent — it’s just rent! This is one way to force yourself to save money, and it does work.

You won’t have to move twice

Packing up all your belongings safely and then moving them from one house to another is tedious at best and a complete nightmare at worst. Who wants to do that twice in one or two years? (If you do, you are a glutton for punishment.)

With rent-to-own, even if you aren’t ready to buy a house today, you won’t need to move twice. Find the house you want to buy, rent it, and then eventually own it — no second move required.

You might be able to avoid competition from other buyers

Rent-to-own bidding wars aren’t typically a thing. In most cases, the seller and the buyer both have reasons to prefer a rent-to-own deal, and another buyer rushing in to disrupt the process is highly unlikely, if not downright impossible.

In the 2022 market, when many buyers are submitting multiple offers before they finally get one accepted, avoiding competition and working directly with a seller (and no interference) can be a huge win. Rent-to-own can help you avoid those bidding war nightmares.

Peace of mind

Have you ever experienced buyer’s remorse? It’s never fun to spend money that you worked hard to earn on something that then feels, well, not really worth it.

Now imagine if that “something” is a whole entire house. Real estate buyer’s remorse is real, and it should be avoided at all costs.

With rent-to-own, you get a chance to become familiar with the house, and to wrap your head around how much it’s going to cost you to own it. By the time you get ready to sign that contract or walk away, you’ll likely have agonized over the decision for hours, if not literal years! The peace of mind that this extended type of contract can buy you is a definite plus.

You can likely make changes to the house

This will vary depending on what the seller/landlord prefers, but in many cases, if you want to start making upgrades or renovations to the house, you can get going right away.

Cosmetic changes — paint, flooring, the kitchen backsplash, light fixtures, and other similar projects — can make the house start to feel like “yours” sooner, and you might not have to wait until the deed is in your name to make them.

Rent-to-own pros for sellers

Why would a seller decide to rent-to-own a house instead of selling it immediately on the open market? There are a few reasons (apart from altruism — which does genuinely drive a handful of rent-to-own sellers!).

No need to get the house sale-ready

Selling a house can be an enormous pain once you actually list it, between open houses, buyer appointments, reviewing offers, and other tasks. But getting a house ready to list before you sell it? Depending on the repairs needed — not to mention upgrades or renovations to get it up to spec with the rest of the neighborhood — this can be an undertaking that ranges anywhere between “mildly obnoxious” and “massively excruciating.”

With a rent-to-own agreement, sellers can skip the part where you declutter, deep clean, and spruce up your house for the potential buyers walking through. Depending on the contract, the buyer/renter might have upgrades they want to make to the house while they live there, which the seller won’t have to finance; it can be the buyer’s headache now.

Establish a steady stream of income

How much income, exactly? That’s going to depend on a few different variables that are outside a seller’s control: the current mortgage payment on the house, the market rent for the house, and how much money the buyer agrees to set aside above and beyond market rent for their down payment.

Obviously, the seller is going to need to continue to pay the mortgage payment while they own the house. And the down payment money isn’t the seller’s to spend; that should go into some kind of account where it can sit untouched until the buyer is ready to take ownership of the house.

That said, there is likely to be a gap between the home’s mortgage payment and the current market rate for rent, especially if the seller bought the house years or even decades ago. Which means a certain amount of extra money every month is going to be the seller’s to spend on whatever they like!

There’s a buyer, and a plan

As any seller can tell you, one of the worst parts of selling a house is waiting for a buyer who really wants it enough to sign a contract. (That might not be so much of an issue in 2022, but it can still be nerve-shredding to those who have to wait for a buyer to bite!)

With a rent-to-own agreement, there’s a buyer who is definitely interested in buying the house — just not right away. And there are several options, and compensation, if the buyer backs out of the deal and decides not to pursue it. At that point, the seller can keep the buyer’s option fee and opt to list the house for sale, try to find another buyer, or rent it.

The house might sell for more than market value

Predicting the future is risky business, especially when you’re predicting the future for the purpose of writing a home sale price into a real estate contract. That’s usually how it works with a rent-to-own agreement, though: The buyer and the seller determine in advance (anywhere between one and three years is typical) how much the buyer will purchase the house for later.

Depending on how this price is calculated, and what the market does in the meantime, this could mean baking in more price appreciation than the market actually experiences. Which means the house is going to be worth less than its sales price when the time comes to buy, and the seller will walk away with fatter pockets than they otherwise would have.

Rent-to-own cons for buyers

There are several reasons why buyers tend to be warned away from a rent-to-own agreement. If you aren’t head-over-heels in love with the house, and if you can afford to get a mortgage loan today, then rent-to-own might not be the best pathway for you.

They can be predatory

One reason why rent-to-own arrangements are often disparaged as scams is because they can indeed be predatory. Sometimes a “seller” will offer a rent-to-own contract for a home they don’t even own, and you might not learn the truth until after you’ve paid an option fee and a rent deposit on the house!

You have no legal rights to the house while you’re renting it, and you need to be very careful about the contract language and conditions. If a deal sounds too good to be true, be wary that it might in fact not be true!

You can lose money

For many buyers, purchasing through a rent-to-own deal is going to be more expensive than buying the house outright from the seller, but those buyers might consider it a worthwhile sacrifice for getting the home of their dreams. However, there are other ways to lose money on the deal.

If you decide not to buy the house for whatever reason, then you’ll likely be losing at least your option fee, if not your entire down payment savings invested with the seller. Depending on what the contract says, you are likely to forfeit some or all of these upfront fees that you paid with the intention of contributing to your down payment.

The contract isn’t a guarantee

Depending on what your rent-to-own contract says, you might find yourself voided out of the agreement if certain conditions are not met.

For example, your contract might state that your rent is due by the last day of the previous month — and if it’s even one day late, then your entire contract is voided.

This is one reason why we suggest looping a lawyer in; they can let you know if there are any conditions like this in the contract. You can suggest a 48-hour grace period as a compromise, or make sure you pay early every month, or walk away from the deal, but at least you’ll know exactly what’s expected of you.

You might overpay for the house

In rent-to-own contracts, the sales price of the house is typically set when you sign the contract. Depending on the contract term, you might be agreeing to buy a house anywhere between one and three years in the future. And most people (even experts) are going to struggle to pinpoint how the real estate market could change in that timespan; there are a myriad of variables affecting the possible outcome.

This means that (as mentioned above) you might get the house for less than its actual market value, but if you overestimated the future sales price of the house, then it’s also possible that you might end up paying more than the current market price for your house when you actually do purchase it.

Depending on how much of a down payment you have saved up, how well you’ve been able to brush up your credit, and a few other factors, a house that appraises below its sales price might not be a huge deal — or it could entirely derail your home purchase. You might need to pay the difference between the appraised value of the home and the sales price, ask the seller to lower the sales price, or walk away from this rent-to-own home.

Rent will be higher than market value

With many rent-to-own agreements, you’ll be paying more than the current market value for renting the house. This extra money is typically intended as a sort of forced savings arrangement; it will be funneled into your down payment when the time comes to buy the house, and this way, you can save up for your down payment while you pay your rent.

That said, not everyone is going to be able to afford paying more than market rates for a rental, even if it’s helping them save up for a down payment. Make sure that you’ll have some wiggle room when it comes to emergencies and other financial needs before you commit.

You might not qualify for a mortgage loan later, either

Unless there’s a compelling reason why a buyer might want to delay a home sale (they’re not sure this is the right house for them and want to test-drive it, for example), most people who want to buy a house prefer to do it sooner rather than later. Rent-to-own allows you to move into a house that you want to own eventually, while you get in the financial shape to purchase it — but there’s no guarantee that by the time your contract term is up, you’ll qualify for a mortgage loan.

Even if you do everything right, save all your pennies, polish up your credit, and meet every last term and condition in the rent-to-own agreement, if you can’t get a mortgage loan by the end of it, then you’ll either need to buy the house outright with cash yourself (probably not an option) or walk away from the sale, thereby forfeiting at least some of your investment. A pretty sad outcome for anybody!

You have no legal claim to the house until you buy it

As the renter-buyer, you will not have any legal claim to the house until you are under contract after the rental period is over. This might not be a big deal (most of the time, it isn’t), but you never know what might happen in between moving into the house and buying it.

If the seller winds up in financial difficulty, there is no guarantee that they won’t take the money you’re sending them for their rent payments (and presumably using to pay their mortgage) and redirect it for other purposes, to pay different debts. If the seller stops making payments entirely on the house, the lender can foreclose on it, and despite your agreement with the previous homeowner, it will likely be put up for auction, and you will not be given the first option to purchase it.

Rent-to-own cons for sellers

Generally speaking, rent-to-own deals are going to be riskier for buyers than for sellers. But there are still some cons to keep in mind when following this route toward an eventual home sale.

The sale isn’t guaranteed

Although it’s highly likely that the buyer is going to follow through with this sale and buy the house they’re renting, that’s not guaranteed. If something happens to pull the buyer away from the house — a new job, a change in a family situation, a pandemic — then the seller will have to find a new buyer for the house, especially if both signed a lease-option agreement instead of a lease-purchase agreement.

Depending on what the contract says, if the buyer backs out of the sale, the seller will keep the option fee and potentially even the additional rent money they paid for their down payment. But they will need to either list the house on the market, or find another buyer interested in going the rent-to-own route, and start over again with that household.

Sellers could lose money on the sale

As we’ve discussed, the sales price of the house is typically set when the rental contract is signed, a year or more in advance of the actual home sale transaction. Both buyers and sellers can do their level best to ballpark where home prices are going to be in their market in one year, but they might not hit the price exactly on the nose; it could be a bit higher than market value (good for the seller!) — or it could be lower.

This is one of the risks that sellers take. Furthermore, backing out of the contract so you can get a higher price for the house on the open market is not only an ethically questionable decision, it can also land a seller in legal hot water if the buyer decides to take action against them.

How to find rent-to-own homes

You’ve read all about rent-to-own homes, and you’re sold on the idea. Now, how do you find one?

Unlike homes for sale, there isn’t a listing portal for rent-to-own homes where you can enter your preferences and see what’s available. Here are alternative methods for how to find rent-to-own homes.

Work with an agent

Real estate agents are formidable allies to have in your corner when you’re trying to rent-to-own a house, in part because of their networks. An agent who’s been operating in the area for several years will know homeowners who are ready to sell, landlords who are tired of the business, and other real estate agents with their own networks of sellers and homeowners (and agents).

Working with a real estate agent who’s familiar with rent-to-own deals can be one of the best first steps you can take to find a rent-to-own house.

Find a brokerage that has a rent-to-own program

Real estate brokerages or teams sometimes will provide their own rent-to-own programs to help buyers get their foot in the door. This helps the brokerage generate business while simultaneously giving buyers an opportunity to own a house that they would not have had otherwise.

One example is Kenna Real Estate in Denver, which offers a “lease with a right to purchase’ program for certain households.

Technically, this step has some overlap with the next step — Home Partners drives many of these brokerage-provided options — however, if there’s a brokerage in your area that’s known for rent-to-own deals, asking your agent to make some introductions is a wise move.

Explore rent-to-own programs

We’ll cover these more in-depth in the next section, including program names and specifics. For now, what you need to know is that there are some companies interested in helping buyers become homeowners and using a rent-to-own pathway to do so.

Home Partners of America is one of the best-known of these; it’s a company that purchases homes for buyers and rents them back to the buyer, giving them the opportunity to buy the home from them in the future. It also works with brokerages.

Divvy is another company that’s attempting to address homeownership challenges by providing rent-to-own options. The startup buys homes for qualified renter-turned-homeowners and gives them up to three years to either buy the house or walk away.

Directly approach and negotiate with a seller

When someone has already listed their home on the market for sale, but it’s not moving for whatever reason — yes, this can still happen even in 2022! — then you may have a good candidate for a rent-to-own proposal.

Sellers and even homeowners who want to get out from under a house, but who can’t find a buyer today, could benefit from considering a rent-to-own deal. They might prefer to sell the house outright today if possible, but rent-to-own would be the next-best option for them, and it’s one they’re often willing to consider.

Talk to a landlord

Not every landlord is a happy landlord! Many of them fall more on the “reluctant” side of the spectrum, where they aren’t sure how to move from “current landlord” to “active seller.” Maybe the house needs some repair or renovation work before it will be fully marketable, or maybe there’s no financial wiggle room to eschew rent for a month or two while the house is on the market.

If you’re currently renting and you like where you live, then your own landlord might be a good place to start. Even if you’re not sold on the house you’re currently renting, talking to your landlord can still be a good move: They might own more properties than the one you’re renting, and they might be ready to think about getting rid of one of them.

Maybe your landlord isn’t interested, but they aren’t the only landlord in town! Spend some time in the rental pages of your local paper or Craigslist and see if you can find names and numbers for people who own a few properties around your area (although one is really all you need). If they have time to talk to you, then it can’t hurt to call and ask if they’d be willing to discuss a possible rent-to-own contract.

Use a foreclosure portal

Websites such as foreclosure.com or realtytrac.com — and even the website hosted by the Department of Housing and Urban Development — offer listings of homes where the homeowner has stopped making payments on their mortgage, and the house is either about to be foreclosed, or is currently in foreclosure.

With a pre-foreclosure listing, you can reach out to the current homeowner and ask if they’d be interested in setting up a rent-to-own plan. Homeowners typically have an opportunity to make up any past-due payments, so even a home that’s currently in foreclosure might be one you could rent-to-own if the homeowner is able to catch up on their past mortgage payments.

Ask around!

Your real estate agent has a network of friends and acquaintances — and so do you! One of the best ways to find a rent-to-own home is to ask around and see who has a home they might be willing to let go of in a year or three.

Social media can be one way to get your message out there, but you can also text or email your friends and family members in the area. Ask them if they or anyone they might know is interested in renting-to-own their house and provide your preferred method of contact (phone, email, and so on).

Rent-to-own home programs

Are there any programs that promote rent-to-homeownership, or that might make it easier for you to get into a house with a rent-to-own contract? Yes! There sure are.*

We’ve rounded up a handful of the most prominent players in the rent-to-own business.

Home Partners of America

Home Partners of America is one of the best-known rent-to-own programs available in the U.S. It works with real estate agents and future residents to purchase homes in a wide number of markets nationwide, and then lease back the home to the resident for one year.

After the year is over, it’s up to the renter-buyer whether they want to extend the rental term for another year, or walk away from the house. Many real estate brokerages offer access to rent-to-own homes through Home Partners of America, and you can see where the platform operates and local market price caps in its program guide.

Divvy

Divvy works similarly to Home Partners of America: Aspiring buyers (and current renters) find a home for sale, Divvy purchases it, and the renter leases it back from Divvy for up to three years.

The buyer can get a mortgage for the house and close on it at any point during the three-year lease, and for the most part, buyers have a wide range of options when it comes to homes — as long as it’s not a manufactured home or a foreclosure, it will most likely work for Divvy.

You can prequalify with Divvy with a credit score as low as 550.

Dream America

Dream America works with buyers interested in homes priced up to $400,000 in select markets in Florida, Georgia, and Texas; the company will rent a home back to an aspiring buyer for a year, at which point they have the option to buy the house.

The program is currently available in Atlanta, Dallas, Jacksonville, Orlando, San Antonio, and Sarasota. Eligible properties must be single-family homes or townhomes that were built or renovated within the past 15 years. Dream America will apply 10% of the rent paid during the year toward a credit at closing.

To qualify, Dream America requires a 500 minimum credit score, 12 months of on-time rent payments, a 50% DTI (including rent), $4,000 in monthly household income, and $5,000 in upfront cash.

Local and regional programs

You might have some luck searching for local or regional programs operating in your city or state to help buyers rent-to-own a house.

That said, proceed with extreme caution — remember that rent-to-own scams are rampant. A legitimate rent-to-own rental rate will likely be higher than market value because you’re setting aside some additional money every month for a down payment on the house. So if you see a rent-to-own property offered for significantly less than the monthly market rent value, that’s a big red flag.

Remember: If it appears to be too good to be true, then it probably is — at least in real estate.

* Note: These program terms, conditions, and standards may change without notice; always check with the program itself to determine your own eligibility!

What standard maintenance issues should rent-to-own buyers expect to deal with?

Part of the deal with a rent-to-own home is that the renter (and aspiring homeowner) is going to be responsible for much more than a traditional renter would tackle. The minutiae will vary depending on the house, the landlord/seller, and the buyer/renter, but generally speaking, these are some areas of responsibility that buyers can expect to take on during the rental period when they decide to rent-to-own a house.

Most of these tasks are items that a renter (and aspiring homeowner) would likely want to tackle on their own, anyway; making time for a landlord or handyperson to come by to clean your gutters or dryer vents is often much less convenient than grabbing a ladder or vacuum cleaner and doing it yourself.

That said, beware of contracts that ask you as a buyer to maintain responsibility for the entire house. If the roof or foundation manifest a problem while you live there as a renter, you do not want to be on the hook financially to fix those flaws before you own the house!

Cleaning gutters

Cleaning the gutters is one of those regular activities that most renters won’t have to think about; if left undone, overflowing gutters can damage your house and even your foundation, depending on where the water is draining.

Getting up on a ladder to clean the gutters at least once a year is something that most rent-to-own tenants can expect to do themselves.

Replacing air filters

The air filter in your HVAC system should be replaced every 90 days or three months, according to most expert recommendations. This is a maintenance task that will keep your heating and cooling system ticking over smoothly; replacement air filters start at about $30.

Landscaping

Perhaps you’re used to mowing the lawn at your rental home already — if not, this is a task that you will likely be taking over from the landlord-seller when the time comes to move in!

Watering and mowing grass, weeding, tending flowers or gardens, and any other “curb appeal” type of activities (including painting fences) are probably going to be the tenant’s responsibility in a rent-to-own deal.

Cleaning fridge coils

The house is just part of the deal; oftentimes, appliances are going to be sold along with the house, which means that in addition to cleaning the oven occasionally, the tenant will want to take time to clean refrigerator coils on a regular basis.

This task keeps the fridge running smoothly (and colder!), and it will extend the life of your fridge if you do it regularly.

Cleaning dryer vents

Clothes dryers don’t just collect lint in the lint trap; that gunk travels all through your dryer vents, which need to be cleaned periodically in order to prevent fire hazards and keep your dryer running at its optimal level.

This might be something that landlords do for tenants, but in a rent-to-own situation, the tenant can count on cleaning their own dryer vents while they rent the house.

Heat and plumbing servicing

If the heat system in your house needs to be flushed once a year to keep it running smoothly, or you need to get the septic tank pumped — those are homeowner responsibilities, which means that a tenant in a rent-to-own situation is likely going to be expected to cover any of these expenses while they live in the home.

Paint touch-ups

Inside and outside, touching up any chipped or flaking paint is going to be the tenant’s job while they are renting the house.

This does not include a full repaint inside and outside — it’s smart to wait to do anything major until you own the house.

Window caulking

Depending on how old the windows are, some or all of them might require recaulking during the rent-to-own period. Rather than wait for a landlord to come eliminate the drafts, this is also likely to be a tenant responsibility.

Minor plumbing repairs

We’re not talking about clearing out a sewer main or repairing a major leak, but under-the-sink clogs and shower or bath drainage issues will most probably be the tenant’s issue to tackle, as opposed to something that the landlord-seller will come and handle for them.

There should be a contract stipulation that caps the amount of money you are expected to spend on items like plumbing repairs, so that “minor” really does mean “not hugely expensive.”

Finally: Are rent-to-own homes really real?

Yes! You really can rent-to-own a home — we found five examples of rent-to-own homes out in the wild, including:

• An investor who believes in homeownership and altruism
• A buyer who signed a lease-purchase agreement for his dream home
• Lease option arrangements in Los Angeles and Columbus, Georgia
• A seller who didn’t have the funds to get their house market-ready immediately

Only you can decide whether a rent-to-own deal would be the best option for you and your household. Talking over your options with an experienced real estate agent who understands all avenues to homeownership will get you that much closer to owning your dream home one day!

Header Image Source: (Roger Starnes Sr / Unsplash)

But what if that sequence of events doesn’t work for everyone? Sometimes you don’t have enough cash saved up for a down payment, or you’re between jobs and can’t qualify for a loan. Maybe there’s a divorce that hasn’t been settled yet or another financial obstacle in your way.

If that’s the case, there’s an alternative route to homeownership you may not have considered: finding a rent-to-own home. These arrangements, when structured properly, can bring a lot of benefits to both buyer and seller.

However, it’s not always easy to uncover these opportunities by simply browsing real estate listings or driving through your dream neighborhood, and you have to be wary of unscrupulous sellers. We talked to expert agents experienced in the rent-to-own process to show you exactly where to look and what pitfalls to watch out for.

Work With a Top Agent to Find a Rent-to-Own Home

When considering a rent-to-own home, working with a real estate agent experienced in these types of deals can help you navigate the process and find a great deal.

Find Agent

What is a rent-to-own home?

A rent-to-own home is an agreement that allows the renter to buy the home from the landlord after a specific lease period. With a rent-to-own contract, you’ll have to pay a lease option fee upfront. This is essentially a security deposit that ensures your right to purchase the property at the end of the lease. In some cases, this fee will be applied to the down payment at the end of the lease term. Lease option fees vary widely with some as low as 1% and others 10% or more.

The purchase price of the home is locked in upfront to save any negotiation at the end of the lease. Rent payments will then include a rent premium, or the portion of monthly rent set aside in an escrow account to be applied toward the down payment. Because of the rent premium, however, it will look like you’re paying an above-market rate. This money will eventually come back to you in the form of a down payment, but if you choose not to exercise your option to buy, that money may be lost.

Let’s take a closer look at the two types of rent-to-own contracts:

Lease option

A lease-option contract is similar to a standard rental lease but includes an option to purchase the home at the end of the lease term. If you choose not to buy, you will lose the option fee and, depending on the terms of the contract, possibly the down payment and any equity in the property.

Lease purchase

A lease-purchase contract means that the buyer is obligated to buy the home at the end of the lease term. If the buyer decides to walk away or doesn’t qualify for a mortgage at the end of the lease, not only do they risk losing their deposit, down payment, and any equity, but they also may be left open to legal action since they broke the terms of the contract.

Pros and cons of rent-to-own

Pros

• A rent-to-own contract locks in the purchase price of a home today, so while you’re saving for a down payment, you’re not racing against rising home prices.
• Rent-to-own provides the opportunity to build your credit score by paying rent while simultaneously living in the home.
• If you have bad credit or circumstances that are preventing you from mortgage approval, a rent-to-own agreement can give you time to iron out the issues while living in the home that you plan to purchase.
• This type of agreement takes saving the down payment out of the buyer’s hands and does it automatically with each rent payment. This is especially beneficial for those who may have trouble saving on their own.
• At a time of persistently low housing inventory in many parts of the country, this is a creative path to homeownership.

Cons

• If you decide not to buy, the extra money you paid in upfront fees and rent payments may be lost.
• Life circumstances can change drastically during the lease term, and in a lease-purchase contract, you may be legally obligated to buy the property at the end of the lease term.
• You may be responsible for maintenance costs.
• If the home decreases in value by the end of the lease, you may have trouble securing financing if the initially agreed-upon price is higher than the home’s appraisal value.

After weighing the pros and cons, if you decide that rent-to-own is for you, here’s how to find rent-to-own homes, help avoid scams, and get another step closer to homeownership.

How to find rent-to-own homes

1. Talk to an experienced agent

One of the most valuable resources at your disposal during the house-hunting process is an experienced buyer’s agent by your side. You’ll want to find an agent who has experience conducting rent-to-own transactions because there can be a lot of unfamiliar terms and conditions with these agreements. Although a seller probably isn’t out to take advantage of you, they want the best outcome for themselves, so they aren’t necessarily working in your best interest. A buyer’s agent is extra armor against a bad deal.

James Silver, a top Detroit-area real estate agent with 19 years of experience, knows how important a good agent is when searching for rent-to-own homes. He’s worked with 76% more single-family-home sales than other agents in his area, and he has extensive experience with rent-to-own properties.

“Sellers aren’t going to help you make all these decisions” that go into a rent-to-own contract, he explains. “That’s why you need a really good real estate agent to advocate on your behalf.”

Not only can an agent offer their insight and years of experience, but they can help you find just the right opportunity, whether that’s through specific MLS searches, their extensive real estate network, or their knowledge of the latest trends in your market or geographic area.

“Rent-to-owns can be helpful to those who do not currently have the money for a down-payment, allowing them time to save,” Silver says. “But it’s also important to remember that if you are not able to purchase at the end of the contract, you may lose any money that went toward rent premiums.”

It’s important to get preapproved for your financing before you begin looking or approach your landlord, so you don’t waste time renting-to-own something you can’t truly afford.

2. Find a brokerage with a rent-to-own program

You also might consider going with an agent or brokerage with dedicated rent-to-own programs to find homes to lease with the right to purchase. For example, top Tampa real estate agent Christina Griffin uses the Home Partners of America program to help her buyers get into homes in their desired neighborhoods.

Not a brokerage, these types of companies are closer to real estate investment firms. They work with you and licensed agents to find a single-family home you may not typically be able to rent. Then, they buy it, set a purchase price for the home, and lease it to you; you have the right to buy the home after your lease is up at the preset price. These programs allow you to move in and get a feel for the home and the neighborhood before fully committing to a purchase.

Griffin’s 19 years of experience, particularly with single-family homes, have given her a lot of insight into the problems that can crop up with rent-to-own homes.

“If at any time the person that owns the home goes into foreclosure or they decide to sell the home, it’s very hard to be able to have the ability to get that money back that you’ve invested,” she says. “More people than I can count, the home went into foreclosure.” The renters had no clue there was even any trouble, and then the home was taken from under them.

Using a rent-to-own program such as Home Partners helps reduce some of that risk. Instead of rent-to-own, the arrangement is what’s known as “rent with the right to purchase.” You pay rent, but you pay nothing additional toward the purchase price. Your rent and the purchase price are both locked in, and you get the right to buy the house whenever you’re ready, according to the terms of the agreement.

Griffin recommends to her buyers that they make sure it’s a rental price that they can afford and that they can make sure they’re in an area where they can buy. “There’s just a lot of uncertainty around rent-to-own unless it’s an investment property,” she says. That’s why a specialist company can benefit the buyer — by removing some of the risks that the seller might not make good on their end of the deal.

3. Contact a seller

An experienced agent can help you think outside of the box and identify listings that have been lingering on the market for months. The sellers of those homes might be especially interested in renting, giving them the opportunity to earn a little extra money per month while both parties move toward an eventual sale.

For a seller who’s been having a hard time selling a property, a rent-to-own arrangement helps them with a monthly income in the form of rent from you. And if you’re not in a position to secure a traditional mortgage, you can be living in a home while you rebuild your credit, look for a job, or wait for legal matters to be settled — whatever your situation may be.

Arranged properly, rent-to-own agreements can benefit both parties. Your agent can help you locate these sellers and negotiate a deal.

Even if a seller isn’t currently offering a rent-to-own option, your agent can float them the possibility.

Silver says, “I call the agent and just say, ‘Hey, I have a client that’s looking for something like this with a lease-option (to buy); they have really good credit scores, they’ll be able to buy in the future, and your seller can collect extra money in the meantime and get what they’re looking for.’” The listing agent can then take that offer to the seller and sometimes work out a deal.

He also offers to call people who have a home for lease. “They’re often open to lease with options — or if it’s just a straight rental, just call and ask people.”

You won’t know unless you ask, and your agent can help you ask.

4. Find a reluctant landlord

Similarly, you and your agent may be able to find a landlord who’s looking for an escape hatch. If they’re interested in selling the property they’re currently renting out, your rent-to-own offer could be a great way to make that transition.

These types of landlords usually have just one rental property, and they may have begun renting it out because they had difficulty selling it. You may be able to sweeten the deal by offering to maintain the home and perform repairs while you’re renting — tasks that reluctant landlords may particularly dislike. In return, if all goes well, you’ve got a home to purchase at the end of the contract: one which you’ve been caring for and living in, so you know what you’re getting.

With high inflation defining the economy in 2022, many small landlords are struggling to maintain their properties thanks to higher material costs. This may lead to more small landlords looking to get out of the business.

According to Kim Alden, a premier luxury real estate agent in the Northwest Illinois suburbs, since the market heated up during the pandemic, “rentals are few and far between and sellers really aren’t in a position where they aren’t able to sell. So it’s really never been even a discussion like, hey, can I make this a rental because it’s not selling because basically everything is selling as long as it’s priced in the ballpark.”

5. Explore the foreclosure market

One source of possible rent-to-own homes is the foreclosure market. Homeowners facing foreclosure might be especially open to a rent-to-own contract; the catch is that you cannot do a rent-to-own arrangement if the house is already in foreclosure. But if the owner is in pre-foreclosure, they can benefit from the rent they collect from you while also securing a path to the eventual sale of the house.

One such specialty portal that can help you find quality leads for rent-to-own homes is foreclosure.com. They have thousands of listings where the seller may be willing to enter a rent-to-own agreement with the buyer to help them avoid foreclosure, and you can browse by state and even by county.

You’ll still need to offer terms the seller will agree to, and it’s worth the money to hire a real estate lawyer to review your contract to make sure all of your bases are covered. And keep in mind, if the home is foreclosed on, you may lose the house and any money you’ve invested so far.

6. Use a specialty portal

There are a number of specialty portals geared toward helping people find rent-to-own homes, including Rent-to-Own Labs, Hidden Listings, and HomeFinder. Each of these cost $1 for a 7-day trial and $49.60 for every month after that. (These prices and terms are, of course, subject to change!)

But these sites also list homes that are for sale, in preforeclosure, or up for sheriff’s sales or foreclosure auctions, so it’s unclear whether all of the homes are actually rent-to-own options or whether the owner is willing to enter a rent-to-own agreement.

For instance, one home that comes up in my area is listed as “Verified” on Rent-to-Own Labs but is also up for “Sheriff’s Sale,” meaning there is a judgment against the home and it will be put up for auction.

If you decide to use any of these platforms, make sure you do your research on the individual property before getting too excited.

7. Look into startups

There are a number of startups out there looking to reinvent the rent-to-own market and clean up the rent-to-own model’s reputation.

Home Partners of America, which we mentioned earlier, is one such company. Along with Divvy, ZeroDown, and Landis (which boasts investors including Jay-Z and Will Smith), these companies essentially allow you to choose a home that you eventually want to buy, purchase it, and lease it to you for a specified period, after which you can buy the home for the predetermined price.

During the lease period, you’ll be building your credit score while you pay rent, and part of your rent payment is set aside for an eventual down payment. Typically, you can keep the down payment if you decide not to buy the house.

8. Reach out to your network

Whether you reach out to your network personally or via social media, you just may find that someone in your circle is trying to unload a home and would love to connect with you. Reach out to your friends, neighbors, and other social contacts. Let them know you’re looking to move; ask around if anyone is open to a rent-to-own arrangement.

You can also widen your net by posting on a neighborhood notice board or a site such as Nextdoor.com or Facebook. You can even join specialty groups on Facebook that are dedicated to finding and sharing rent-to-own homes. Just be careful when advertising or connecting outside of your circle, because rent-to-own scams abound. It would be crushing to pay years of rent credits and an option fee only to find the “seller” doesn’t legally own the home or never intended to sell it at all.

Is a rent-to-own home for you?

Before deciding on a rent-to-own agreement, make sure you think long and hard about the pros and cons. It’s difficult to know where your life will take you, so locking into a home purchase for some time in the future needs to be something you’re absolutely sure you want to do.

Alden says she rarely sees rent-to-own agreements that work out. She notes that tenants start to cool on rent-to-own contracts once they realize everything that goes into it. “They have to pay an attorney because it’s literally like a purchase contract that’s just going to have an extended closing period,” Alden says, “so when they find out they have to pay an attorney to write up the contract and they have to have a preapproval, they tend to shy away and go and just look for a traditional rental.”

If you do decide to pursue a rent-to-own home, no matter which way you go about finding one, it’s incredibly important to protect yourself against financial disaster. Get everything in writing, get a trusted expert to look it over, and don’t rush into anything — especially if it sounds too good to be true.

Header Image Source: (Pixabay / Pexels)

In the meantime, you’re still paying rent, maybe even more each month than you’d pay for a mortgage payment. But what if a portion of your rent were going toward purchasing your rental home at a later date?

That’s exactly the dream that rent-to-own deals are selling, but what’s the catch with rent-to-own homes?

Rent-to-own basics: Crediting rent toward a future purchase

Also known as a lease-purchase agreement, a rent-to-own contract is an agreement between the tenant and the homeowner stipulating that a portion of the monthly rent is credited toward the future purchase of the property.

Then, when the lease ends — typically within 1 to 5 years — you’ve saved up a credit with the homeowner that effectively serves as your down payment.

Sounds ideal, right?

A rent-to-own deal means you can start paying toward a home purchase even if you can’t technically qualify for a mortgage yet.

“Most people considering a rent-to-own purchase either don’t have a high enough income or good enough credit to buy a house right now,” says experienced Washington state agent Hao Dang, who’s sold over 76% more properties in the Seattle area than the average agent.

But renting-to-own isn’t quite so cut-and-dried. There may be additional fees paid to the seller that will not count toward either your rent or your down payment, and you could also be on the hook for maintenance and repairs from the day you move in — but we’ll get into more of all of that shortly.

Is rent to own a good idea?

These deals carry a risk for both buyer and seller, but renting-to-own can make sense if the deal is structured properly. And because rent-to-own agreements tend to occur organically — they generally aren’t listed and marketed in the same way as conventional sales or rental offers — special terms can often be written in from the outset.

“It’s more of a one-on-one deal based on the personal circumstances of both parties,” says Rick Fuller, a top agent in the San Francisco Bay Area.

Fuller explains that, in his market, rent-to-own agreements usually arise when a landlord is interested in selling their house sometime in the future, and they happen to meet a tenant who is interested in buying but still needs a little time to save up their down payment or raise their credit score. In short: a rent-to-own deal makes the most sense when it’s going to be a win-win for both parties.

Summer Rylander, a HomeLight contributor who sold her own South Carolina home through a rent-to-own agreement a few years ago, agrees.

“My house needed significant updates that I simply didn’t have the cash for, and my tenant was eager to buy in the neighborhood, but she needed time to improve her credit history and didn’t mind an imperfect property,” Rylander explains.

In this case, a rent-to-own agreement made sense because both parties clearly stood to benefit from the arrangement — and they were willing to be patient with one another.

These types of deals can be packaged very differently, however.

A lease-option versus a lease-purchase agreement

Lease-purchase and lease-option may sound similar, but there’s one very big difference: one is a requirement and the other is a choice.

• A lease-purchase, or a rent-to-own agreement, legally binds you to purchasing the home once the lease is up
• A lease-option gives you the opportunity to buy the house before the lease is up

Yes, lease-purchase and lease-option contracts are both types of rent-to-own agreements, and while each can be risky as a buyer, a lease-option at least offers you an out if you later decide the home isn’t actually for you.

Choosing not to exercise your purchase option will almost certainly result in the loss of your option money — that’s the fee you would have either paid as a lump sum up-front, or paid towards each month with your rent payment — but you won’t be on the hook to commit to closing on a home you no longer want.

With a lease-purchase or rent-to-own agreement, you do have an obligation to buy the home.

The real risks of rent-to-own contracts for buyers

Rent-to-own contracts (of the lease-purchase variety) may sound good on paper, but you shouldn’t sign one without carefully considering the drawbacks, too.

Let’s review several possible pain points you should consider before signing a rent-to-own or lease-purchase agreement.

1. You’ll probably pay more in rent every month than you would as a renter

Let’s face it — landlords aren’t going to credit a portion of your monthly rent toward the purchase of the house out of the goodness of their hearts. They’ll expect something in return.

This “catch” is usually more per month in rent than you’d pay in a simple rental arrangement. And not all of that “extra” you’re paying each month is going toward your purchase credit.

For example, let’s say the standard rent for a property is $1,700 a month, but the landlord is offering a rent-to-own deal for $2,000 a month. Don’t expect to be credited for the whole $300 extra you’re paying each month.

In the fine print of this deal, it could turn out that you’ll be credited just $200 of that $300 each month. So, in reality, you’re paying this landlord $100 simply to “save” money for you.

But it may be helpful to shift perspective and think of this as a convenience fee because few homeowners will choose to delay the sale of their home by a year or more when they could otherwise probably close in 30 days once their house is under contract.

2. You’re paying less toward the price of the house than you’d think

Putting several hundred dollars a month toward the purchase of a house before you can actually afford a mortgage sounds like a smart financial move on the surface.

But when you run the numbers, you’ll see that the sum total of the credit doesn’t actually amount to much, even in the long run.

“It’s just like leasing a car. If you actually pay off and purchase a leased car, you’ve paid a lot more than if you’d simply purchased the car outright,” explains Dang.

Let’s say you’re paying $2,000 a month in a rent-to-own deal on a $400,000 home — and the landlord agrees to put $200 a month (or 10% of your rent) toward the price of the house.

That’s only $2,400 in one year. 

In five years (the maximum of most lease-purchase agreements), that’s a total of only $12,000 that’ll be credited against the agreed-on purchase price.

And you could pay that much just to get into the deal in the first place, because…

3. Most rent-to-own contracts require a nonrefundable upfront fee

Sure, renters expect to pay fees to lease an apartment or house for things like security deposits and application fees — sometimes as much as two-months’ rent.

But if you’re opting for a rent-to-own deal, expect to feel a little sticker shock.

Most lease-purchase agreements require an upfront, nonrefundable, one-time fee that’s calculated by the home valuation. While the amount is negotiable, it’s typically between 2.5% to 7% of the agreed-upon purchase price.

Do the math, and you’ll see that you’re paying anywhere from $10,000 to $28,000 (on a $400,000 house) just to get into the rent-to-own deal.

That may be around the same or double what you’ll pay again in closing costs when you eventually get a mortgage on the house.

For example, if you get a 30-year, fixed-rate mortgage for $380,000 (after making a $20,000 or 5% down payment on that $400,000 home), you’ll pay around $13,000 in closing costs in Phoenix, AZ, according to Bank of America’s closing costs calculator.

Alternatively, you could save the upfront fees you’ll pay on a rent-to-own deal, put that money in a savings account — or better yet, a mutual fund — and let it earn interest so you can afford to purchase a home sooner than you could in a rent-to-own deal.

4. You may lock in at a bad valuation

Like the price of gas, home values are constantly fluctuating. Sure, it’s true that, historically, home values increase over time because it’s an appreciating asset.

However, in the short term, list prices rise and fall by thousands of dollars within the span of weeks or months.

That can be a problem with the rent-to-own because most lease-purchase contracts state the agreed-upon sales price of the home in the contract. In other words, you’re locking in the price of the home one to five years before you buy it. 

“It is possible for a rent-to-own contract to just set a purchase price range, but typically, you’re negotiating and locking in the price of the house long before you actually buy it,” explains Dang.

“If the property value has decreased when it comes time to purchase the house, the tenant is still locked in to pay the higher price.”

If the home value does decrease below the agreed-on purchase price, be prepared to lose the money you earned as a credit toward the purchase price. You’re likely to run into appraisal problems, and no bank is going to sign off on a mortgage for more money than the house is actually worth. So, unless you’re able to cover the difference, you won’t be able to purchase the property when your rent-to-own contract is up.

Alternatively, the value of the home could increase during your lease period — great news for you, but not exactly enticing for the seller. For this reason, finding a landlord who is willing to agree to a rent-to-own purchase in the midst of a seller’s market as frenzied as 2020 and 2021 have been may be extremely challenging. Today, a rebalancing market may make more landlords amenable to a rent-to-own agreement.

5.  You’re on the hook for repairs to the house

Not only are landlords unlikely to make a profit-free rent-to-own deal, they’re also not thrilled about dumping money into fixing up a home they plan on selling soon.

Unlike standard rental contracts, the catch with most rent-to-own agreements is that they include conditions that say the tenant pays for all repairs and maintenance to the property.

This puts the responsibility for repairs and upkeep on you.

“I definitely stipulated that my tenant was responsible for maintenance and repairs as soon as she moved in,” says Rylander. “I wanted her to feel as though the home were hers from day one.”

(While rent-to-own contracts do vary by state and could potentially put the responsibility for repairs on the actual homeowner, don’t count on it.)

At first glance, that seems like a reasonable arrangement. After all, you’re planning to own the home in the near future, so you’re probably happy to pay to have repairs done to your satisfaction.

However, this is a risky move, because there’s no guarantee that the deal will go through as planned.

What’s actually happening when the hot water tank bursts, the appliances break down, or the furnace fails, is that you’re paying to replace those items in a home you don’t legally own yet.

“It’s not an ideal scenario,” admits Rylander. “Though my tenant and I both readily agreed to these terms, the advice I would give a rent-to-own buyer today is to be wary if you’re looking at a house that needs work. Repairs or improvements are a lot to take on for a property that isn’t technically yours, and you don’t want to feel resentful before you’ve even made it to the closing table.”

Furthermore, if you default on the lease, you may not be able to buy the house — so you’ll lose the rental credit money and every penny spent making repairs and home improvements.

And it’s surprisingly easy to default on a rent-to-own agreement.

6. Late or missed payments for any reason could kill the deal

When you’re late with your rent in a standard rental agreement, the worst you’re looking at is a steep late fee (unless you’re a repeat offender and eviction is on the table).

No biggie, right?

If it’s a one-time situation due to unavoidable circumstances and you’re otherwise a stellar example of a pay-on-time tenant, then one late payment won’t do much damage. Your landlord may even be so understanding as to waive the late fees.

Honestly, a rent-to-own landlord may be that understanding, too. However, even if they are understanding and waive the late fees, read the fine print on your agreement very carefully, because a late payment may still void the rent-to-own contract.

And it’s not just late payments that are an issue. There’s a long list of scenarios that can trigger a default in a rent-to-own contract, such as violating a “no pets” clause, or failure to make required repairs in a timely manner.

Even if you’re a perfect tenant who’s followed the contract to the letter, there’s still a chance the rent-to-own agreement could be voided.

Let’s say you can’t afford to buy the house, or you fail to secure a mortgage, when the lease is up — don’t expect a refund. Failure to make good on the purchase nullifies the lease and that rental percentage credit you earned vanishes.

7. The rent-to-own setup is vulnerable to scams and shady landlords

As the tenant, you take on most of the risk in a rent-to-own contract.

You’re the one who is (probably) paying more than necessary in rent each month, with the promise that the owner will credit the amount toward the purchase price someday. And you’re the one trusting that the money you spend on repairs is going into a home you’ll own someday.

Your landlord has very little risk because they remain the owner of the home throughout the lease. If you default, they get to keep the house and all the money you’ve paid.

That being said, selling a home through a rent-to-own arrangement is likely not your landlord’s secret retirement plan.

“Honestly, I was stressed every month waiting on the rent check,” says Rylander. “I still had a mortgage payment to make, whether my tenant paid on time or not. People like to make a villain out of landlords, but sometimes we’re genuinely just one person with one property, trying to make ends meet just like you — not every rental scenario is profit-driven.”

Nevertheless, the financial jeopardy you put yourself in is serious enough that the Federal Trade Commission issued a report that rent-to-own agreements can be shady deals and downright scams.

According to the consumer information report, defrauded rent-to-own tenants have found out too late that:

• The landlord can’t legally sell the house because they don’t actually own it
• The seller leaves you with several years of unpaid property taxes
• The house is in disrepair, or has hidden issues like lead or asbestos
• Promised fixes aren’t made after a contract is signed
• The house is headed for or in foreclosure

Should you fall victim to one of these scams and an unscrupulous landlord, then at best you’ll have an unpaid tax bill. At worst, you’ll have spent years thinking you’re paying down the price of a home that you’ll never be able to purchase.

In Michigan, top Battle Creek-based agent Cassie Scramlin warns that there is no real way to know for sure that your landlord is making payments on the home. And even if the foreclosure process begins, you’re still on the hook for your own rental payments as agreed.

“It’s important to understand that [in Michigan] you’re bound legally by that lease-purchase or rent-to-own agreement to make your payments, regardless of whether or not the seller is making theirs,” says Scramlin.

She advises would-be buyers to work with an experienced agent and exercise due diligence to make sure they have the best possible chance of successfully purchasing the home. Scramlin encourages buyers to ask sellers for a title policy search to understand right away if there are any liens, tax issues, or other problems that could delay or prevent a sale.

8. And that’s not all…

In addition to the significant risks and inconveniences of rent-to-own agreements, further drawbacks may include:

Difficulty finding a home

As mentioned earlier, it can be tough to find a seller willing to enter a rent-to-own agreement. When the real estate market is in favor of sellers and available homes are limited, there’s simply little motivation for a homeowner to delay the sale of their home in order to let you rent it first.

Choices may be limited

Even if you find a willing seller, there’s a limit to the types of homes that might be offered as rent-to-own. If you’re looking for a luxury property, for example, it’s unlikely to happen. The same goes for uniquely constructed homes — if you have your heart set on one that has sustainability at the forefront of its design, you’re probably not going to find a seller offering a lease-purchase.

What if you don’t like it?

Admittedly, this could happen even if you purchase a home straightaway, but what happens if you move into a house on a rent-to-own agreement and realize you don’t actually want to own the place? You’re probably not going to get back the money that has been set aside toward your future down payment if you pull out of the deal. And — again, this is where it’s key to read the fine print on any sales or leasing contract — the seller may be able to pursue legal action for your failure to uphold your end of the agreement.

What if you can’t get financing?

Even if you spoke with a lender before setting out to find a rent-to-own property, there’s no guarantee you’ll be approved for a mortgage by the time your lease is up and it’s time to buy. You can help minimize complications by carefully discussing steps to improve your credit score with a mortgage lender early in the process and ensuring that you make timely payments, but unforeseen things can certainly happen.

If you have a lease term of one, two, or even three years before you’ll be obligated to buy the home, lots can change in terms of income, market value of the property, and mortgage interest rates. Proceed with caution.

Bottom line? Do your due diligence

Rent-to-own agreements aren’t automatically a bad idea — they can be a good thing for both buyer and seller — you just need to do your homework before signing on the dotted line.

As Fuller mentioned, an honest conversation with the seller is most likely going to be how you’ll discover the possibility of a rent-to-own or option to purchase after leasing, so use this opportunity to gain understanding. A homeowner who is eager to sell their home is unlikely to choose a rent-to-own agreement as their ideal sales strategy, so if they’re open to the idea, it’s fair to ask them why.

Scramlin also encourages buyers to ask if a homeowner is current on their mortgage payments. While, sure, they could lie and say yes when they’re actually three months behind, most states require posting a notice of default in the public record after a certain period, so it’s quite possible to find out if your home-of-interest is barreling toward foreclosure.

And don’t forget Scramlin’s suggestion to run a check on the title of the home, which will uncover any liens due to unpaid taxes, unpaid repair companies, family grievances, property disputes, and so on.

Finally, even if — perhaps especially if — the home is to be sold as-is, or if you’ll be responsible for the cost of maintenance and repairs during your rental period, do not skip the home inspection. This is your best opportunity to find out what you’re dealing with should you choose to take on this house.

Don’t forget, the drawbacks we’ve discussed apply mostly to lease-purchase agreements, but a lease-option contract isn’t far behind. The latter could be a good deal for you if you negotiate well and it’s written with your interests in mind, but it’s not without similar pitfalls.

So, when does a rent-to-own agreement actually make sense?

Renting-to-own might make sense for you if you know your financial situation will be improving soon. Maybe your mortgage lender has indicated that your credit history will be in good shape to reassess a loan in six months, or maybe you’ve just started a new job with a strong salary and you know you’ll be able to save up a down payment quickly.

Renting-to-own can offer breathing room when you’ve found a home you love but can’t get a mortgage for just yet — but you shouldn’t go in without a plan. Agreeing to rent for, say, three years before trying to buy leaves quite a few unknowns, and the more unknowns there are, the riskier the deal.

Finally, if you’re interested in purchasing the house you’re renting, and your landlord offers you a rent-to-own contract that’s actually a lease-option agreement — don’t automatically say “no.”

Remember, a lease-option provides just that: an option to buy. You may have to pay an option fee for this privilege, but it might be worth the cash if you’re happy in your home and would like the chance to make it your own.

In either case, ask a real estate attorney or a top local agent with rent-to-own experience to review the contract first to determine if the lease-purchase or lease-option is a good deal for you. If it’s not, another option is to simply lease a smaller, less expensive property and put the money you’ll save on rent toward building a down payment for your dream home down the road.

Header Image Source: (Holly Stratton/ Unsplash)

Or, maybe the idea sounds so far-fetched you wonder if rent-to-own homes are even real in the first place — totally fair!

But renting-to-own is a real and valid path to homeownership, so we talked to five people who’ve done it — either from the buying or selling side — to learn more. This includes perspective from Margaret Labus, a real estate agent in the Lake Geneva, Wisconsin, area, who has 18 years of industry experience.

Before we get into the stories, let’s start with a brief primer on the business of renting-to-own (RTO).

RTO 101: An introduction to rent-to-own homes

As we’ve already introduced, yes, rent-to-own homes are real. It’s a perfectly legal way to buy or sell a house — and creates a unique scenario that requires extra patience and understanding from both sides.

“It’s not terribly common to rent-to-own because most of the people who are in the rental situation are those who, for whatever reason, can’t get financing the conventional way through a bank,” explains Labus. “But, it does open some possibilities with the right seller.”

These possibilities can be stipulated in the rent-to-own agreement — which is also sometimes referred to as lease-purchase, or a lease-option agreement.

The main difference is that with a lease-option, a tenant has the — you guessed it — option to buy the home at the end of their lease term. With a rent-to-own or a lease-purchase agreement, however, the tenant has already agreed to buy the home after a specified period.

Renting-to-own isn’t for everyone, and it’s definitely not something you should go into without doing your research. But if you’ve found a home you love and you just need a little more time to get your credit in order or save up a down payment, a rent-to-own agreement could be your literal foot in the door.

The only thing is, the seller generally also has to see a benefit in the agreement, otherwise they may as well just sell the home outright — but this isn’t always the case.

1. Renting-to-own as an act of goodwill

Though it’s true that most sellers would rather finalize the transaction as quickly as possible once they’ve accepted a purchase offer, not everyone is in a hurry to relocate or collect equity.

“One investor I work with works solely in the rent-to-own arena, because they have it as their mission to supply good and fair housing to people who don’t have the means to purchase right now,” says Labus.

Her investor client believes that everyone deserves to live in a place they can be proud of and be treated with dignity.

“With each house purchased by this investor, there’s an express goal to renovate and build out a home nicely, then turn it around and have it available for a tenant to rent-to-own,” Labus explains.

Labus’ investor client maintains around 50 homes in their area and is happy to accommodate a tenant’s request to move to another part of town — effectively transferring their rent-to-own agreement as needed.

“It’s not every investor who works like this, but this person has deep roots in the area and they’re emotionally committed to the success of our communities.”

2. A lease-purchase on a dream home

Homeowner Jeff Johnson bought his Maryland home through a lease-purchase agreement. The flexibility of this arrangement made possible a purchase he was not yet in a position to otherwise pursue.

“I opted for a lease-purchase agreement because this was my dream home,” says Johnson. “I didn’t have enough finances at the time, and the lease-purchase agreement allowed me to save some money for the down payment.”

Since one caveat of rent-to-own homes is that property values are likely to change during the term of the agreement — which could extend from one to five years — buyer and seller must determine a sales price that feels fair to both parties.

“The price I agreed to was slightly higher than market value at the time of purchase, and that’s because the lease agreement was for three years,” explains Johnson. “The property value would obviously rise during that time, so it seemed like a fair deal to me.”

In Johnson’s case, both parties successfully upheld their ends of the bargain, and he paid the agreed-upon price at the end of his three-year lease term.

“Rent-to-own seemed like a great option to me because I was in a financial rut. This allowed me to save some cash for a down payment, pay all the bills on time, and improve my credit score — all while living in my dream home that I’d eventually get to buy.”

Johnson admits that there was one unexpected challenge with renting to own, and that was property maintenance.

“I had to take care of the repairs on my own,” he says. “This is usually the landlord’s responsibility, so I was a little surprised when I had to pay for all of the maintenance.”

So it’s no surprise that Johnson’s advice to prospective rent-to-own tenants is to ensure that maintenance and repair requirements are clearly outlined in the contract to avoid unpleasant surprises (or potentially biting off more than you can chew).

3. A rent-to-own with an option to buy

Keith Sant bought his home in Columbus, Georgia, following a five-year rental agreement with an option to purchase.

“While signing, the price we agreed upon was $230,500, and 20% of my rent went toward the down payment,” says Sant.

He was grateful for the opportunity to save money and improve his credit score while living in a house he’d already locked in at a fair purchase price. Five years is a long time in the real estate world, and Sant acknowledges that interest rates did fluctuate while he was renting — but those ups and downs didn’t negatively influence his decision to buy.

“Since the purchase price was decided on the agreement while signing, that didn’t change,” he says.

Sant had been searching for a home for eight months before finding the one he ended up renting-to-own. And, knowing he could lose money if he chose not to exercise his purchase option, he didn’t take the decision lightly.

“I weighed the pros and cons of renting-to-own from a buyer’s point of view, and eventually I decided to go with the deal,” Sant explains.

“Rent-to-own can be a good idea for buyers who are unable to qualify for a mortgage — instead of putting up a heavy down payment before moving in, you can build equity in the house over a period of time.”

For anyone considering a rent-to-own home, Sant recommends thoroughly researching the seller.

“Check the credit report of the seller for any red flags. Obtain a title report to see how long the seller has owned the property — the longer they’ve owned the property, the more equity they have.”

Even if you have a few years of renting ahead of you, if you’re potentially going to buy the property, don’t skip your due diligence before signing an agreement. Have a home inspection completed, order a title search, and — we can’t stress this enough — get everything in writing between you and the seller.

4. Rent-to-own for the flexibility

In busy Los Angeles, homeowner Cristina Ortega bought a home through a rent-to-own agreement that offered an option to buy.

Though she knew a portion of her rent was being set aside for a down payment and that she would likely lose those funds if she chose not to buy, Ortega appreciated the flexibility of the rent-to-own arrangement.

“I was able to test out my home and the neighborhood before sinking all of my savings,” she explains.

Ortega further enjoyed the ability to make her home feel like it was really hers — even before her name was on the property record.

“When renting-to-own, you have more flexibility than most tenants. You can renovate, decorate, and maintain your home as you like,” Ortega says. “You also lock in the purchase price in the initial contract, which ensures that you pay the same price even if property values rise in the meantime.”

Of course, rent-to-own agreements vary, so don’t just assume that yours will be a renovation free-for-all. You’ll want to set those parameters with the seller to specify what types of changes are and are not allowed from the very beginning.

Ortega says that her own only qualm with renting-to-own was that the house does remain in the landlord’s name during the rental period — and this can possibly lead to a legal nightmare.

“If the homeowner defaults on their mortgage payments, there’s a chance the house could go into foreclosure.”

Rent-to-own homes are real, but buyers should proceed with caution. It’s worth repeating: Do your due diligence!

5. Renting-to-own from a seller’s perspective

This is where I break the fourth wall, dear reader, and share my own experience as a homeowner who once sold a house in South Carolina using a rent-to-own agreement.

Selling under these conditions was not my first choice, but the home in question was in need of updates and repairs that I simply didn’t have the cash for at the time. I couldn’t afford to bring the house up to desirable market conditions, but with limited equity in the property, I couldn’t sell it at a fixer-upper bargain price, either.

When an interested buyer — who already lived in and loved the neighborhood — called and asked to look at the house and promptly fell in love despite the 1980s builder-grade “charm,” we were both eager to work out a deal.

Her finances were in great shape, but she needed time to build up her credit history before her mortgage lender could approve a loan. And I’d had a FSBO sign in my yard long enough to know that prospective buyers were not lining up at the door.

So, we signed a one-year rent-to-own agreement at a purchase price of $110,000. She paid a $3,000 non-refundable option fee upfront, and rent was $1,000 per month with $200 set aside toward her down payment. (My monthly mortgage payment was $780 — I was not making money on this agreement!)

Importantly for me, we agreed — in writing — that she would purchase the house as-is and be fully responsible for all maintenance and repairs for the duration of the rental period.

In the end, it took a little more than two stressful years before we were able to complete the deal.

Would I navigate a rent-to-own home again? No.

Am I glad the concept exists? Absolutely!

They’re real — but they can be risky

Rent-to-own deals can be a welcome solution for both buyers and sellers — but there are risks on both sides.

As a buyer, you could potentially spend thousands of dollars on maintenance and routine repairs for a home that isn’t actually yours yet. And if your seller defaults on their mortgage even though you’ve been paying rent on time, the home could go into foreclosure without you having any idea it’s happening until there’s a notice taped to your door.

Sellers, meanwhile, assume the risk of late rent payments, limited knowledge as to the condition of the home during the rental period, and the possibility of a buyer needing longer than anticipated before the sale can be completed.

And both sides run the risk of the other party backing out. Financial protection for all parties may be built into the rent-to-own contract, but there’s little to be done about the inconvenience and disappointment resulting from a deal that falls through.

“RTO” may be short for rent-to-own, but it’s also a good reminder of the three things you’ll need for this type of transaction to be successful: Research, Trust, and an Open mind.

Header Image Source: (karen roach / Shutterstock)

There are many reasons that a prospective homebuyer could be interested in renting to own. Maybe your credit score could use some polishing, you aren’t quite sure where you want to buy, or you still have those pesky student loans to pay off (ahem, all millennials!) and don’t want to get into more debt.

Whatever the reason might be, you’re not alone — but before jumping into rent-to-own with both feet, you should understand the potential risks. After talking with agent expert Armand Lencheck, who works with 74% more single-family homes than the average agent in his area of Chapel Hill, North Carolina, we’ve compiled a list of 13 reasons why rent-to-own can be a bad situation for buyers, and also provided some alternatives to get your foot in the door of your first home.

The reality of rent-to-own

When looking into rent-to-own contracts, the first thing you might notice is that a “standard” rent-to-own contract doesn’t exist. The rent-to-own process varies by state, and these contracts are usually written by legal advisors working with the buyers and homeowners.

In general, a rent-to-own contract usually covers a time period of between 12 and 24 months — this is the time that you will rent the home before actually buying it. The rent-to-buyers will usually pay an “option fee” when they move in, which is typically 1% to 7% of the purchase price. This fee gives you the first “option” to purchase the house; it is typically non-refundable and is a sign of good will that the tenant is seriously interested in buying the property at the end of the contract.

When the time comes to buy, the option fee is usually applied to the down payment. If the buyer decides not to buy the house, then the seller keeps the option fee.

As a potential buyer, you will usually pay market-rate rent plus some agreed-upon additional funds each month that will also go toward your down payment. This additional monthly payment is usually refundable if the buyer backs out, although the rent portion of that fee is not.

The purchase price of the home is usually set in the rent-to-own contract when you move in, not at the time you buy the home, so you typically can’t negotiate the sales price after you have rented for the term of your contract.

On top of all this, unlike a more traditional landlord-tenant scenario, the buyer is usually responsible for maintenance to the home prior to the purchase.

So: Why is rent-to-own bad for buyers?

Let’s discuss some more specific reasons why renting to own can be a bad idea for buyers and what the alternatives might be.

1. Lease purchase vs lease option

All rent-to-own contracts are different depending on the specific situation; some contracts are “lease purchase” rather than “lease option” agreements. A lease purchase agreement means the buyer is obligated to purchase the house instead of reserving the first option to buy it.

Even if you are confident that this is the home for you, and that you should have the money to buy it at the end of the contract, there are always events that could change your mind. What if you get your dream job (and it’s located across the country), or what if you or a member of your family has a health emergency and you have to move? Heck — what if there is a global pandemic and your financial circumstances change!

If you’re totally sold on the idea of rent-to-own, don’t consider lease purchase agreements and insist on a lease option agreement instead — because if the past few years have taught us anything, it’s that you never really know what will happen in a year or two.

2. The purchase price might be inflated when the time comes to buy

Rent-to-own contracts will usually stipulate how much you’re going to pay to buy the house at the beginning of your contract, so the buyer is effectively locked into that purchase price. The buyer and seller will agree on a price at the start of the contract based on what the market is doing then, and they might not get it right!

The price documented in the contract could be much higher than the home’s market value at the time of purchase, which could be a problem when it’s time for a real estate appraiser to come into the picture — a bank won’t loan more money than a house is worth.

Before signing a rent-to-own contract, talk to a market expert (like a real estate agent) to get their opinion about how the market is growing, or shrinking, to land on a price that you think is fair.

3. You’ll still need to repair your credit and accrue some savings

Let’s be honest — there is usually a reason why rent-to-own sounds like an appealing idea, and that is typically because you don’t have your ducks entirely in a row to buy a home today. You might need a higher credit score to get a mortgage, or save a bit more for a down payment.

Renting-to-own isn’t a get-out-of-applying-for-a-mortgage-free card — you’ll need to secure financing later, when you do buy the house, at the end of the contract. This means that you have a fixed amount of time to get your finances in shape if they need a little TLC, and there isn’t any guarantee that you’ll be approved for a mortgage when the time comes to buy.

Instead of getting yourself into a situation that could be financially detrimental, be vigilant about improving your credit score and saving the money you’ll need to buy a home, and wait for the right time. There is no pressure to buy a home immediately (no matter what your dad might say!).

4. You’re paying more than market value in rent

Don’t forget: there’s no rent-to-own without “rent.” Most of what you will be paying every month is just that, rent. The additional amount agreed upon between the buyer and seller in the contract will go toward your down payment — but remember, you are still paying monthly market-rate rent to the seller until you buy, and that money will not go toward your down payment, and won’t be refundable if you back out of the deal.

If you are already struggling financially, paying more than market value in rent every month might not be the best fiscal move. So if you are getting into a rent-to-own agreement, make sure that you’re not spending more than you can afford, and get an opinion from a financial advisor on the amount you are paying in rent and what’s going toward your down payment vis-a-vis your income and savings.

5. You’ll still need to save up for the down payment

The option fee that you pay at the beginning of your contract and the extra money you’re spending on rent every month will put a dent in your down payment — but it’s unlikely to get you a large down payment.

Think of it this way: If you are in a rent-to-own contract for one year, and the house you are buying will cost $200,000, the option fee will be 1% of that purchase price ($2,000). Then, if you are paying $500 in additional rent each month, by the end of the year you’ll have paid an additional $6,000, for a grand total of $8,000 toward your down payment.

That’s 4% of the home’s total purchase price — not bad by any means, but nowhere close to the 20% you’ll need to plunk down on a conventional loan if you want to avoid private mortgage insurance.

You’ll have to cut corners elsewhere and make sure you’re saving up as much as you can to get the mortgage that you want when it comes time to buy. If you are turning to rent-to-own because you are low on funds for your down payment, some viable alternatives might include down payment assistance (grants and loans), asking friends and family for help (double check loan gifting guidelines), or see if you can qualify for a USDA or VA loan (0% down) right now instead of waiting.

6. You probably won’t get all your extra investment back

Remember, there are three payments that you will make toward your home during your rent-to-own contract: the option fee (non-refundable), monthly market-rate rent (non-refundable), and the additional money that you pay per month, which goes toward your down payment (usually refundable).

That said: Beware of additional fees! The seller might stipulate in the contract that they are charging an additional “convenience fee” on top of all the rest for allowing you to rent, and then purchase the home at a later date. The seller has the right to keep your option fee, your monthly rent, and any additional convenience fees — this could mean money you’re spending that isn’t going toward your down payment; you’ll never see it again. Make sure that you’re clear on how much you’re going to get back, the potential situations under which the seller could keep all your money, and then determine whether it’s worth it to you.

7. If you decide not to buy the house, you’ll lose money

If for whatever reason (ahem, a global pandemic!) you decide to back out of the deal, you are almost certain to lose your option fee — and you might even lose the additional money you’re putting toward the down payment, depending on what is written in your contract.

Pretty certain that rent-to-own will be the best solution for you? Look into programs like Divvy, which have a rent-to-own mentality but do give you your money back if you decide to walk away. In many cases, it will make most financial sense for you to wait, save, repair your credit, and buy a house when you and your bank account feel ready.

8. You may be on the hook for repairs

Many rent-to-own contracts stipulate that the renter will handle any repairs to the home from the time you move in. This could include anything from fixing a leaky sink to installing a new roof.

If you’re already stretching to make your rent and additional payments, will you realistically have the funds for maintenance and repairs? Instead, before you sign your contract, talk to the seller about adding a stipulation that you will split costs, or make sure you can really afford to repair and maintain the house before you actually buy it.

Lenchek says: “You need to determine who is responsible for the major maintenance of this house versus the minor maintenance of this house. It has to be specifically agreed upon in the contract, or there will be big arguments later.”

For a glass half full scenario: if you (the buyer) are responsible for the maintenance of the house, then you have complete control over the quality of the repairs and which contractors you can hire. If the house you are planning to buy does need a large repair, like a new roof, it could give peace of mind to the buyer to oversee that construction. That is of course, if you have the savings to make it happen.

9. When mortgage rates are low, waiting can be costly

We’ve said it before and we’ll say it again: You just can’t know for certain what will happen in a year or two. In 2021, mortgage rates are historically low, but in a rent-to-own situation, there is no guarantee what your mortgage rate will be when you apply for one when you’re ready to buy — and when mortgage interest rates rise, your purchasing power decreases proportionally.

See if you can get financing with today’s rates to buy a home. If you have a good amount of money saved, it might be easier than you think to buy a home now instead of waiting in a rent-to-buy contract, and you might qualify for low down payment programs, especially if you are a first-time buyer!

10. If you’re late with one payment, the whole deal could be over

Many rent-to-own contracts stipulate that if the buyer is late on their monthly payments, even once, they no longer have the option to purchase the home, lose their option fee, and potentially also lose the extra rent they’ve been paying.

Before signing your contract, you need to make sure you’re clear on what happens if you are late on one or more rent payments, and exactly when the rent is due every month. Be sure to also note any reasons for eviction listed on your contract.

Lenchek says: “What we have found is that there are a lot of sellers out here in the marketplace who get that non-refundable deposit, and then turn around and look for excuses to evict the buyer from the house. That’s the biggest red flag [in the rent-to-own field] — the sellers of the home are looking for the smallest excuse, the smallest infraction against the lease to use against the buyer to evict them from the house, pocket that substantial part of the down payment and then put the house back on the market to be sold, or, rent it out again under the same terms.”

Before you sign anything, make sure that the lease isn’t just geared to meet the needs of the seller, and that it is fair to you as a renter as well.

11. If the homeowner stops making their payments, you’ll lose the house

A truly horrific rent-to-own scenario is if you are making all your monthly payments on time, but the seller isn’t.

Rent-to-own deals are usually between two private, individual households, and you don’t necessarily have a clear picture into the seller’s finances when you sign the contract. Ideally, they are taking your rent payments and paying their own mortgage with it … but you have little or no guarantee that they will.

Because the house isn’t yours until you actually buy it, if the seller stops making mortgage payments on the house, the bank can foreclose — no matter what kind of deal you made. In this situation, even though the seller would owe you the option fee and other additional payments, it could be very difficult to get your invested money back without going to court and paying legal fees.

In this case, working with a company can be a more sound investment than an individual; in any event, make sure your contract stipulates what the owner’s payment responsibilities are, so that you have some legal grounds to stand on if they take your option fee and rent and take off to Mexico.

12. The house might not be in peak condition

Often, a seller’s reason for starting a rent-to-own deal is because the property has been on the market for a long time without any offers. The owner could be occupying it or renting it to tenants — or it could have been left vacant for some time.

Depending on how well the most recent occupants kept up with it, it might be in great shape, or it might require some fixes. In a rent-to-own scenario, get a home inspection before you sign anything (and definitely before you move in) as you would during a more traditional home purchase. Make sure to ask your home inspector if they recommend any additional specialized inspections for things like pests, radon, or mold.

13. Rent-to-own can be scammy!

Unfortunately, there are a lot of bad deals out there claiming to facilitate rent-to-own purchases! Many states don’t acknowledge rent-to-own as a standard home-buying practice, and there are no standard contracts in this field — rent-to-own is an area flagged by the Federal Trade Commission for a reason!

There are many reasons that rent-to-own contracts can fall through, leaving little protection for the investments of buyers or sellers.

Before getting lured in by the rent-to-own concept, do your research and work with an expert, like an agent or a real estate lawyer, who can help protect your interests, and who has your best financial interest in mind.

If you are dead set on renting-to-own, above all else, remember to advocate for yourself, do your research thoroughly, and hire experts who can point out potential issues you could run into on the road to rent-to-buy.

Header Image Source: (Sergei Golubev / Unsplash)

“Rent to own could be an option for someone who just doesn’t have the ability to qualify to purchase right now,” says Ed Kaminsky, a top-selling Southern California-based agent with 34 years of experience.

“A buyer can save enough money for a proper down payment, or wait out an expected financial change — maybe they’re going to have a better job, get a raise, or maybe an inheritance. In time, they’re going to have the down payment.”

Indeed, rent to own can be a viable option for owning a house… but is it right for you?

In this expert-backed guide, we’ll walk you through the process of getting into a rent-to-own home as a buyer — step by step, from learning about how the process works to closing on that new home.

Step 1: Educate yourself

As with any home search, you’ll need to understand the market as you explore the possibility of a rent-to-own home arrangement.

Isolate the specific area where you want to rent to own, and collect your data, including:

• How much is typical rent?
• How much does it cost to buy?
• How does that translate into monthly mortgage payments?
• Apart from housing costs, what’s the cost of living otherwise, and how much is it possible to save with your income while you work toward homeownership?

Further, take time to learn more about this type of purchase. Importantly, know the difference between a lease option (which only obligates the seller to offer to sell you the house when the time comes) and a lease purchase agreement (which obligates both parties to the sale — so yes, that requires you to go through with it, too).

As with any real estate transaction — or any major transaction at all, for that matter — an informed buyer is one poised to come out ahead.

Step 2: Find a rent-to-own home

First, talk to a local agent who is experienced with rent-to-own transactions. These come with specific terms and conditions, and experience is key.

An experienced agent can help you by conducting specific MLS searches, consulting their real estate network, and through general knowledge of market and area trends. You also might consider going with an agent or brokerage with a dedicated rent-to-own program.

You might work with your agent to contact a seller directly. For instance, an experienced agent can help you identify listings that have been lingering on the market for a long time, whose sellers might be particularly interested in a rent-to-own setup where they can take in some extra cash monthly while moving toward an eventual sale.

On the flip side, you might work with your agent to find a landlord who wants to get out of ownership and has simply been renting as a way to carry costs while ultimately hoping to get clear of the property.

Finally, work your own network. Maybe someone in your sphere — perhaps a friend, neighbor, or co-worker — wants to eventually get out of ownership and would be open to a rent-to-own arrangement. Put your interest out there in conversation and on social media, and you might turn up the perfect option in your own community.

Step 3: Negotiate with the seller

When you rent to own, you won’t be writing an offer that the seller accepts like you would with a regular sale. Instead, this looks more like a rental contract with additional stipulations, so both parties will want to make sure you agree on what it says.

“Negotiations have to do with the market conditions and the seller’s motivation,” Kaminsky explains.

Consider these points for rent-to-own contract negotiations:

• What will the purchase price of the home be? How will you determine that? (Will you get an appraisal and ballpark future value growth, for example?)
• How much is the option fee? (This is an upfront payment that might or might not be credited toward your down payment when you buy.)
• How much will the monthly rent be? Will there be a rent credit that goes toward your down payment?
• When will that purchase take place? (One to three years is typical.) Is there a renewal clause that lets you extend the contract term if need be?
• Who’s responsible for maintenance while you’re renting to own? (Usually, it’s the buyer — unless the issue is major. “If there’s a roof issue or a plumbing issue, the owners generally respond,” Kaminsky says.)
• Will there be additional fees or expenses? (How about dues to an HOA, for example?)
• Are there any restrictions on how you can use the house while you rent it? (Say, no pets, or no gatherings larger than 10 people?)

Step 4: Have a lawyer review the contract

This is pretty self-explanatory, but you don’t want to skip it.

Make sure the language protects your interests — and that a lawyer signs off. To protect yourself, consider adding contingencies (such as an inspection contingency) that allows you to get an inspection before you occupy the house so you’re fully aware of any existing conditions. To that end…

Step 5: Order the inspection

As a renter, you typically wouldn’t do any formal inspection as part of your contract. But as a rent-to-owner, you really want to know what you’re getting into, and a home inspection is the best way to do that.

It’s important to know the home’s condition in order to assess the sensibility of making the deal on your end. The intel from an inspection can also be helpful if you’ll be taking on some or all of the home’s maintenance needs while renting.

Step 6: Pay the option fee

At this stage you’ll pay your option fee, also called a premium payment or option consideration. This is an upfront payment that may be credited toward your down payment when you purchase the home.

Step 7: Move in and pay rent

Sure, it’s always important as a tenant to pay your rent on time. But when you’re renting to own, missing payments could kill your chance of ownership: In some cases, a late payment could void the rent-to-own contract. And if that happens, whatever you’ve paid toward the price of the home is typically lost, too.

By the way, it’s not just late payments that can jeopardize your chances at this stage either: other issues that could trigger a default in a rent-to-own contract include violating a no-pets clause or failing to make repairs in a timely fashion, to name two examples.

Step 8: Work on your credit

If you’re renting to own so you’ll have better loan terms when you buy in a few years, start working on your credit in preparation.

“It could be a situation where your credit score is low, and it’s going to take you a year to fix it,” Kaminsky says. “Maybe you have the down payment, but you have to build your credit score back up from the 500s or whatever it might be. So maybe it’s a matter of working with a credit repair company, or just taking care of the problems you’ve created with due payments. Carving out time to get that cleaned up is the perfect reason to consider rent-to-own.”

The higher your credit score, the better interest rate you’ll be able to get when it’s time to secure your mortgage loan. (Lenders offer much better rates to buyers with excellent credit scores, and that translates to big savings over the life of the loan). Ideally you’ll have a credit score of at least 620 to qualify for a conventional loan, though you’ll likely need a 760 or higher to get the best terms possible.

Here are some among the doable ways to improve your credit score:

• Pay down — or pay off — high-interest loans
• Put bills on autopay or schedule them on your calendar so you don’t miss any
• Don’t close any unused accounts
• But do request a higher limit on your best account
• Try to pay off your balances in full every month
• Ask that your rent is reported to the major credit bureaus so you can build credit while you’re renting to own

Step 9: Save for closing costs

Don’t forget about saving for your closing costs. You’ll have to pay them at the time of closing, and they can surprise you if you’re not prepared.

Closing costs can run between 2% and 6% of the home’s purchase price.

Step 10: Ensure there are no title issues

Even if you had the title reviewed when you signed the contract, you don’t know exactly what’s happened with the seller financially since then… unless you check. So do so, and make sure the title is clean at this stage.​

Step 11: Apply for a mortgage

At the end of your contract term, it’s time to apply for that mortgage you’ve been working toward by saving and improving your credit.

When you apply, provide your lender with documentation for the premium payment and rent credits that you already made to the seller, in addition to the original purchase contract, the original appraisal (if you have one), and any inspections that were made during this time.

If the purchase price is significantly higher than the appraised value, you’ll have to go back to the seller to negotiate — or come up with the difference — because a lender is unlikely to approve a loan for more than the home is worth.

Step 12: Buy the house

Improved financial picture: check. Mortgage loan: check. Close on that new home: check.

You did it! Congratulations on homeownership.

Header Image Source: (mark chaves / Unsplash)

Could a rent-to-own agreement be just right?

To be sure, it’s a less-traveled path. Just 1% of homebuyers purchase the home they previously rented, according to a 2021 report from the National Association of Realtors. (That figure doesn’t capture renters who ultimately walk away from a rent-to-own situation — more on that later.)

You may be asking, “What should I know about rent-to-own homes?” To find out, we talked to experts like Rick Fuller, a real estate agent in the San Francisco Bay Area, Eric Dunn, director of litigation at the National Housing Law Project, and Robert A. Miller, a real estate attorney based in Prescott, Arizona.

This primer will tell you what you should know about rent-to-own homes: the good, the bad, and the ugly.

What is a rent-to-own home?

With a rent-to-own agreement, you make an agreement with the seller that they will either sell you their house or offer you the option to buy after a certain period of time (usually within one to three years).

Once the agreement term concludes, you pay a down payment, secure a mortgage, and transition from tenant to owner. The rent payments you made may reduce your purchase price, contributing to your down payment, and lowering your total mortgage loan.

Fuller, who has 18 years of experience, shares a rent-to-own buyer success story. His team represented a seller who rented a Brentwood, California, house to a tenant interested in eventually buying the property. Over five years, the tenant paid a couple extra hundred dollars a month over her monthly rent, eventually taking the option to buy and contributing more than $10,000 to her down payment.

“The nice thing was … this particular buyer bought the property with this option, and they bought it with a price tag of five years ago,” Fuller says.

“This really works in an escalating, rising market for a buyer.”

Understanding your options: lease option or lease purchase

To get the agreement that works best for you, it’s important you work closely with an experienced real estate agent. While your exact arrangement will be unique to your situation and the seller’s, it may fall into one of two types: lease option or lease purchase.

Lease option

This path is similar to a standard rental lease. The big difference is, you pay an option fee to purchase the home at a later date. This option fee locks the sales price, but you’ll still owe a down payment at the time of purchase.

Lease purchase

If you opt for a lease-purchase agreement, part of your rent will typically go toward your eventual down payment (some lease options have this feature as well). This means you are likely trading a higher monthly rent for a lower down payment at the end of the term. Once your contract ends, you are obligated to buy the property.

How does rent-to-own work? 7 important things to know

Option fee

If you opt for the lease option route, the seller may ask you to pay what’s called an option fee (also known as premium payment or option consideration). It’s typically between 2.5% and 7% of the agreed-upon purchase price, and it locks your sales purchase price. You can negotiate whether the fee counts toward your down payment.

The money usually isn’t refundable, so if you default on the contract’s terms, or choose not to purchase the house, the homeowner can keep it.

Purchase price

When you sign a contract with the current homeowner, you’ll agree to the future purchase price. Here’s where working with an experienced real estate team comes in handy. “For a tenant, knowing the trajectory of the real estate market is important,” Fuller says. “If you secure an option and identify a purchase price, and the market declines, then nobody is going to exercise that option to buy a home above what market value is or even above what the property would appraise for.”

“Working with a real estate agent and understanding the local dynamics of that market are imperative for a tenant,” he adds.

Rent payments

Just as you would with any rental, you should expect to pay monthly rent payments while you rent to own. Make sure you’re paying your rent on time, every single month. Late payments could jeopardize your contract.

Rent credit

In some rent-to-own agreements, part of your rent will go toward your eventual down payment.

Maintenance agreement

If you’ve been a renter, you’re used to calling your landlord when something breaks. That might not be an option with a rent-to-own home. Depending on how your contract is written, it may be your responsibility to replace the fridge when it stops running or pay the plumber to fix a leak.

These costs can add up — especially if you decide not to purchase the home.

Lease term

The term of your lease, or the time limit, is how long you’ll rent the house before you opt to buy it (or have to, depending on your contract).

Closing the sale

Your path here was different, but you’ll still go through that same rite of homeownership: getting a mortgage and closing. You’ve already got the keys in your pocket and your shoes in the closet, but when you close you’ll officially be the homeowner. Make sure you’re prepared to pay the typical closing costs.

Pros and cons of rent-to-own

Deciding to purchase a home is a big life decision; so is deciding to rent-to-own. Here are some pros and cons to weigh.

Pros

For certain aspiring buyers, a rent-to-own arrangement can be a good fit. “If someone finds a property that they’re renting that they would really like to purchase, this can be a good option,” says Fuller.

One reason is because they can lock in a price.

“You can actually secure a price and then buy the home a year, or two years, or even three years later, and the equity that is accumulated over those several years is something the buyer could benefit without actually having ownership of the property,” he says.

It can also be structured to provide you with a “forced savings account,” Fuller says. If saving money is a challenge, you may find it helpful to contribute to your down payment or closing costs as part of your monthly rent payment.

Other advantages include:

• You might get lucky and earn instant equity if your home appreciates above the agreed-upon purchase price.

• Building good credit takes time. If you make financially sound moves, you can improve your credit, and hopefully obtain a mortgage with better interest rates.

• You’ll avoid having to move again — and all the stress and money that goes along with a move.

• You get a chance to test-drive your new house and neighborhood.

• By pursuing a less common option, you can avoid heavy market competition.

Cons

When it comes to rent-to-own arrangements, Dunn, whose career includes 16 years as a legal aid attorney, is wary. “I generally don’t think it’s a good idea,” he says.

He cautions that these arrangements can be predatory, targeting low-income renters and minorities. “It’s really a transaction form that originated as a means of exploiting people of color that couldn’t get access to the types of mainstream financing that’s available to whites, and by and large, that’s what it still is,” he says.

You may be required to maintain the property and make repairs, an extra responsibility and expense many renters want to avoid. Worse, the property might be in bad shape, with the landlord using a rent-to-own setup as a way to avoid having to fix it up themselves, Dunn says.

Other drawbacks may include:

• Your monthly rent could be more than you would pay for a rental.

• If you pay a nonrefundable option fee, you could be out several thousand dollars without even owning a house.

• You expose yourself to market risk if the house doesn’t appreciate as expected.

• Maybe you’ve made 23 on-time rent payments. But if you’re late on rent payment No. 24, it could put the whole deal in jeopardy.

• Should you decide not to purchase the house after all, you risk losing what could be a significant amount of money.

• A rent-to-own situation gives you more time to get your credit and finances in order to qualify for a mortgage. But, if at the end of the term you still don’t qualify, then what?

• Sometimes the unexpected can happen. The house could be foreclosed on if the owner is not making mortgage payments, for example, which puts your arrangement in jeopardy.

Is a rent-to-own arrangement the right move for me?

There’s more than one way to become a homeowner. For certain life situations, a rent-to-own arrangement might make the most sense.

You need time to improve your credit

Most buyers require a mortgage to become homeowners. But if you have poor credit, that can be a significant barrier to getting a mortgage with a solid interest rate.

Renting a home, even just for a year or two, gives you the opportunity to strengthen your credit and qualify for a mortgage.

You’re struggling to save for a down payment

It can be challenging to save up for a down payment. By renting to own, you give yourself more time to build up your bank account. Plus, part of your monthly rent payment may be directed toward your eventual purchase.

You’re working on reducing your debt to buy a home

Lenders might balk at providing a mortgage loan if your debt-to-income ratio (your monthly minimum debt payments divided by your monthly gross income) is too high. While you rent, you can focus on paying down your debt.

You plan to stay in the home for a while

If you found a home and location that will fit your needs for several years to come, a rent-to-own arrangement could pay off for you. Plus, you’ll have peace of mind knowing you won’t have to move.

Miller, who has more than three decades of experience practicing real estate law, has another point of view. Certain rent-to-own arrangements could work out if you’re new to an area and like the house but need some time to decide if you like the neighborhood.

“You tie up the property, but at the same time, you’re not tied up to it,” Miller says.

How do you even find a rent-to-own property?

Let’s say you’ve decided to move forward with a rent-to-own approach. Now you need to find the right house.

Fair warning: This could be challenging. “The rent-to-own properties are not well organized,” Fuller says. While prospective buyers can visit plenty of online sites to browse houses for sale, and prospective renters can do the same for rentals, there are not many websites that list rent-to-own opportunities, he says.

Your best bet is to follow these tips.

Work with an experienced agent

An agent who has experience with rent-to-own transactions can be your best advocate through this complex process. Not only can they provide you with real estate knowledge and help you locate opportunities, but they can also help you to understand the terms and conditions that often accompany these types of agreements.

Most of his clients set out looking for a property to rent, Fuller says, then decide they’d like to purchase the property they found once they’ve rebuilt their credit or saved up for a down payment. In his experience, most landlords are receptive to an option agreement.

“When we find the right property, and the right tenant, and the right landlord, a lease-option becomes very possible and can be a win-win for all properties,” Fuller says.

Explore alternate options

Some companies offer rent-to-own programs, an option you can consider to reduce risks like having the homeowner go into foreclosure, or decide not to sell to the tenant at the end of the term. In this scenario, the company purchases the home and leases it to you, as the buyer. Once you’re ready to purchase, you purchase directly from the company.

One example of this type of program is Home Partners of America. Home Partners offers one-year rental leases that can be renewed for up to five years. Renters sign a “right to purchase” agreement, which sets a predetermined price should they decide to purchase the house from Home Partners.

Similar programs are available through Divvy and Verbhouse.

Approach a seller who’s not having luck with the market

Maybe you or your agent have noticed a house that’s been on the market for a while. Why not ask if the seller is interested in a rent-to-own arrangement? For the seller, the benefit is a monthly income stream. Your agent can approach the seller and make the suggestion.

11 top tips for buyers considering rent-to-own

Think about where you are in life

Are you planning on staying in the area a long time? Is this property going to fit your family’s needs years from now? Avoid “buyer’s remorse” by asking these questions up front, Miller says.

Get an inspection and appraisal before signing your agreement

You don’t want to end up with a house that’s going to saddle you with endless repairs, or that will be worth less than your purchase price. Be sure to do your homework.

Research the property — including its title — before signing

Repeat this mantra to yourself: no surprises. You want to do as much research as possible before you sign an agreement.

Research the seller/landlord, too

Does the seller really own the place? Make sure you are dealing with a trustworthy person. Miller warns: “If the landlord starts getting landlord’s remorse, they will do everything they possibly can to get out of that agreement.”

Consult with a lender before entering the deal

Talk to a couple lending institutions before you sign anything. If your goal is to qualify for a mortgage in two years, ask what financial steps you need to take to achieve that goal. You can also look into getting pre-approved so you know exactly what you’ll be able to afford.

Watch out for scams and shady dealings

Unfortunately, the rent-to-own landscape has its share of scam artists.

Double and triple check everything

Make that quadruple. You’re about to take a big leap into a financial arrangement that carries significant risk for you as a buyer.

Follow the agreement to the letter

Comply with the agreement, especially when it comes to making on-time rent payments. “Make sure that you’re going to be able to comply with the financial obligations under the agreement, because it’s usually the money that does people in,” Miller says.

Ask about additional fees

Who will pay property taxes? What about homeowners insurance or homeowners association fees? Make sure you know about any bills that may come to your front door, and that your contract clearly states who will pay for them.

Consider using a lawyer

A lawyer can look over your contract with a fine-tooth comb. If you’re not “absolutely positive” about the terms of your agreement, it might be wise to consult with an attorney, Miller says.

Use the right agent

Whether you’ve decided a rent-to-own agreement is right for you, or you want to pursue a traditional home purchase, it helps to work with a trusted real estate agent who has the right experience for your situation.

Header Image Source: (FrankHH / Shutterstock)

With a rent-to-own contract, you typically lease a home for a specified period with an option to purchase when the lease is up. That gives you a chance to clean up your credit or save for a down payment while living in a house you plan to own.

However, before signing the rent-to-own contract, be aware that the contract is different — and more complex — than any regular lease you’ve signed. Read it carefully, and be sure you understand precisely what you’re signing.

To help you understand the differences between a rent-to-own contract and a regular rental contract, we’ve spoken to a real estate agent and attorney who has handled several such deals, read sample contracts, and then collected the highlights around what you need to know.

Buyer (and seller) beware

Rent-to-own home contracts come with risks for both the buyer and seller, says Ruth Wordelman, a longtime real estate agent in Colorado Springs who is also a licensed attorney. She has more than 20 years of real estate experience and has worked with over 77% more single-family homes than the average Colorado Springs agent. She has also handled several rent-to-own contracts for clients.

The biggest risk comes with pricing because the buyer and seller must agree today what the home’s price will be one, two, or three years down the road when the lease is up. If home prices rise substantially, the seller is leaving money on the table, she notes. If prices drop, the buyer is overpaying and may have trouble getting a loan.

The situation is made muddier because most RealtorⓇ boards don’t issue a standard rent-to-own contract. “I would recommend having an attorney review and explain all the risks to either party,” Wordelman says.

Rent-to-own home contracts

Unlike a standard lease for a rental house, the rent-to-own agreement generally includes two parts, a rental lease and an option-to-purchase agreement. They can be two separate documents or combined into one.

The rental lease portion should spell out the duties of the renter and landlord, with typical clauses covering topics such as the amount of rent, when it’s due, and whether the landlord requires you to maintain renter’s insurance.

The option-to-purchase spells out the agreed-upon price for the house, proposed closing date, when you need to secure financing, and other details about a future sale.

Be sure you’re signing an option-to-purchase and not a lease-purchase agreement. What’s the difference?

• With a lease option, you’re leasing the house and will have the option to buy it at the agreed-upon future date. However, you’re not legally obligated to buy the property, so you could drop out of the deal if you can’t get financing or move to another city.
• With a lease-purchase agreement, you agree to buy the house at the end of the lease. You may not be able to get out of the contract if you can’t get a mortgage or if you change your mind about the house.

Differences to consider

The rent-to-own contract has many clauses, and you may want to negotiate some of them to better accommodate you in case problems crop up.

1. Length of rental agreement

It’s not unusual for a rent-to-own lease to extend for two or three years. If you’re cleaning up your credit, you may appreciate the time to pay down debt. Before signing, negotiate what will happen if you want more time to work on your credit.

The agreement doesn’t have to cover an extended period, however. Wordelman had a client who signed a six-month rent-to-own agreement, allowing the buyer to complete a divorce before acquiring the house.

2. Inspection required

In a typical rental contract, you don’t usually get the property professionally inspected. But with a rent-to-own contract, it’s advisable to get a home inspection before signing.

You need to know the home’s condition to assess whether you’re getting a good deal or whether the property is in poor condition. Information from an inspection can also be helpful if the seller wants you to take over some or all of the home maintenance (more on that later).

3. Future sales price

The contract must contain a price for the house, which means you must decide today what you’d be willing to pay for a house one, two, three, or more years in the future.

Both the buyer and seller are taking a risk here. If the economy tanks and home prices fall before the sale date, the buyer could be locked into a price for more than the house’s fair-market value. In that case, they may have trouble getting a loan because of a low appraisal.

For sellers, the risk is that the local housing market will heat up before the sale date, causing local prices to jump. In that situation, the seller could have gotten more money by selling on the open market.

4. Upfront fee

Another way that a rent-to-own home contract differs from a regular rental agreement is the upfront fee.

The upfront fee is similar to earnest money when you buy a house, and it may be applied to the purchase when the sale closes. However, if you back out of the deal, the money may not be refundable. Again, read the contract to ensure the money applies to the sale and whether it’s refundable.

Because sellers want the deal to go through, they use a hefty upfront fee so that the buyer has “skin in the game,” Wordelman explains. “The seller wants the buyer to put in a lot of money so they won’t back out.” Her divorcing client put up $50,000 as a nonrefundable upfront fee, which was credited to the purchase when he went through with the deal. Typically, upfront fees range from between 2.5% and 7% of the sales price.

5. Above-market rent

In some cases, the seller will charge rent higher than the going rate and promise to apply the extra money as a purchase credit or down payment. The money should be kept in an escrow account.

Check the contract to be sure all the extra money you’re paying will be credited to the purchase. And remember that if you walk away from the house without buying it, you could lose all the extra money you paid.

Also, beware that being late on your rent doesn’t just mean facing a late fee in some rent-to-own contracts. Instead, paying your rent late can result in you losing the option to purchase entirely, plus losing all the extra rent and upfront fees you paid.

6. Maintenance

Some rent-to-own home contracts require the renter to take over home repairs. In a typical rental agreement, the renter may be responsible for basic maintenance such as mowing the lawn, but repairs to the home itself are the owner’s responsibility.

Sellers in a rent-to-own situation may argue the future buyers will reap the benefit of the repairs, so they should pay for them. They also believe the buyer has a vested interest in keeping the home in good shape. Of course, if you end up not buying the house, you also lose the money you put into the repairs.

You can negotiate who is responsible for the upkeep, but the contract needs to be very clear on issues such as who pays to replace the water heater should it break, Wordelman says.

7. Other fees

The rent-to-own contract may also require the renter to pay the property taxes for the home. If you agree to this, be aware that you can’t claim the property tax deduction on your federal income tax return unless you own the property.

The owner may also expect the renter to pay any homeowner association fees, and the renter can negotiate this arrangement.

Additional points to negotiate

You need a carefully constructed lease to protect both parties in a rent-to-own home deal. Wordelman says, “You should hash out in advance how things will be resolved” in a variety of situations, such as the renter failing to keep up their renter’s insurance.

The Georgia Bar Association’s model lease with option-to-purchase contract suggests having terms and conditions covering:

• Price
• Expiration date
• Non-refundable option fee
• Percentage of rent applied to the sale
• How the buyer can exercise the option to purchase
• Rental rate, due date, and late fees
• Who is responsible for paying utilities
• Who is responsible for maintenance and repairs
• Security deposit details, if any, including how much may be returnable if the renter doesn’t buy the house
• Conditions, such as failure to pay rent, that cause the renter to default
• Provisions for a title examination
• Closing date for sale if the renter exercises the option to purchase

Beware of scams

The Federal Trade Commission warns that rent-to-own homes can also be a scam. Possible scams include:

• A “seller” who doesn’t own the property
• A home with unpaid back-taxes
• A home that needs expensive repairs
• A home going into foreclosure

Work with experienced professionals — real estate agent, attorney, and home inspector — to confirm that the rent-to-own home contract is a fair deal for you. Otherwise, the rent-to-own process that sounded like a perfect solution could bring you bigger problems than you signed up for!

Header Image Source: (tokar / Shutterstock)

Rent-to-own million-dollar homes just might be your ticket to living in a nice house today, with the mortgage coming sometime down the road.

With rent-to-own homes, you get to try the home on for size while holding the door open to purchasing the home later. As you’re paying your regular monthly rent, you can also set aside extra funds that will go toward your eventual down payment. That gives you more time to work on your credit score and get ready for a mortgage.

But buying a million-dollar house comes with a jumbo mortgage, and you could be in big financial trouble if you bite off more than you can chew. Defaulting on your mortgage can tank your credit score, plus you could lose your house.

Why not test the waters and make sure you can afford the home by renting first? Although it’s not common, you can rent-to-own million-dollar homes. It’s a way to get yourself into a really nice home today — not, you know, five years from now. We’ve talked to a luxury home expert and run the numbers to show you just how people make rent-to-own work with costlier homes.

When does it make sense to rent-to-own a million-dollar home?

Rent-to-own homes are not for everyone. This method of buying a home can be more complicated than a straightforward home purchase, and it’s not a widely used technique.

However, for certain buyers, renting a home before buying it is a method that can solve problems. Whether you’re struggling with a hot housing market or concerns about your credit score, rent-to-own homes could be your ticket to homeownership.

When starter homes cost a million dollars where you live

Red-hot market prices make it tough to get into your first home when the price of entry is a million bucks. If you live in a high cost-of-living area, you’re familiar with home prices in the millions. Even small homes can easily go for $1 million in markets such as Austin, Seattle, and San Francisco, where the median list price of a home is $1.6 million.

And in the era of the coronavirus, “Many landlords have been lowering rents to get tenants in large cities,” says Aviva Pinto, CDFA, CDS, managing director at Wealthspire. When rents and home prices are volatile, it could make sense to lock in a home price — and a rent — that works with your budget.

Big list prices mean big down payments, too, and it can take a while to save up that sort of cash. For example, if you want to put 20% down on a million-dollar house, you’ll need to bank $200,000 first — plus $40,000 to cover closing costs, which are typically about 4% of the price of the home. Depending on your salary and other expenses, that could take a long time to save up.

But by using rent-to-own for these million-dollar properties, you open up a new path to homeownership, giving yourself more time to save up a down payment.

When you don’t have a credit history in the U.S.

Your credit history is very, very important to mortgage lenders. They don’t hand out home loans to just anyone; they need to be sure that you’re going to pay back what you borrow, and that’s especially true when you’re talking million-dollar mortgages, known in the industry as jumbo home loans.

If you don’t have a strong credit history in the U.S., whether because you’re coming from another country or you simply haven’t built a history here yet, that can make it tough to get a home loan.

While lenders may be able to use manual underwriting to vet you for a loan, you’ll still need, at the very least, 10% for a down payment ($100,000 on a million-dollar home) and 12 months of mortgage payments in reserve ($30,000 to $40,000 cash).

But with a rent-to-own home, you can use the “renting” period to also build up your credit score, proving to mortgage lenders that you’re a safe bet for that eventual home loan. Plus, the better your score, the more likely you are to win a lower interest rate on your mortgage when it’s time.

When you’ve found your dream house, and those are the terms

Of course, you might have a credit score that’s just fine, but the house you’ve fallen in love with comes with rent-to-own strings attached.

If so, consider the offer. Many sellers have found that structuring their home sale as a rent-to-own can be a win-win situation for all parties involved. It gives sellers guaranteed income, in the form of your rent. And if you intend to purchase the home, you’re more likely than other renters to take very good care of the property — an ideal tenant to a homeowner.

Rent-to-own brings a lot of perks and flexibility to the potential buyer, too. If you lock in a great price when you sign the rent-to-own agreement, and the home appreciates in value, you could walk into your new mortgage with instant equity when it comes time to purchase.

If the million-dollar home you’re considering is a rent-to-own, it’s a good idea to examine the potential and see if the overall deal could work out in your favor.

When you want to take a home for a test-drive

Finally, the ability to rent-to-own million-dollar homes opens the door for testing out not only the home, but also the schools, the community, and even your commute.

Sometimes, it’s hard to know whether someplace can really feel like home until you’ve lived there. Plus, you don’t want to get six months into a mortgage and find out the neighborhood isn’t meeting your needs, or the drive to work is way longer than you expected.

With rent-to-own, you’re not locked into a mortgage and forced to try to sell if you decide the home and its location are not a good fit. Selling in the first couple years of a home loan might mean you lose money, since you’ve only been paying on the interest, and you have closing costs and other fees to factor in.

Rent-to-own lets you take the home for a test-drive, giving you added confidence that you are making the right decision when you do decide to buy.

How does it work?

If a rent-to-own million-dollar house sounds like a good solution for you, you’ll need to know how it works. Fortunately, the rent-to-own process is basically the same regardless of the home price.

Note that rent-to-own agreements may go by other names where you live, such as “lease option” or “lease with the option to purchase.”

Work with an agent

First of all, it’s a good idea to work with an agent for these deals. They’ve got the experience, not to mention the industry connections, to help you land just the right agreement.

Most importantly, your agent has your back. They have a fiduciary responsibility to look out for your best interest, and they have the know-how to help you avoid signing a contract that doesn’t benefit you at all.

Agents also have unique access to the MLS (multiple listing service) as well as their own network, which can help you to find these rent-to-own million-dollar homes. And if you don’t live in an expensive area, an agent might actually be the only route to finding these types of homes.

Rick Fuller, a Contra Costa County, California, agent who works with 75% more single-family homes than the average agent there, says an agent is indispensable in rent-to-own or lease-option situations.

“Knowing the market value and where the market is going may be very helpful in establishing a lease option,” Fuller says.

Your agent can help you identify a rent-to-own situation in an up-and-coming neighborhood, where home prices are poised to explode. But they can also help you steer clear of declining areas, where you might be locked into an overly high price in a couple of years, compared to market value.

“You want to make sure that you don’t get into a lease option on a property and pre-define the price, and then find out two years, three years, or five years later that the property is worth less than what your option agreement is,” Fuller says.

If home prices are a million dollars now, but $800,000 down the road, you’ve lost out on your option money. You’ve also locked in a bad price and wasted time on a house in a neighborhood you might not want to be in later.

Put down a deposit

Once you and your agent have landed on the right home, you’ll likely need to put down a deposit to lock it in. If you decide to buy the house later, this will be rolled into your down payment.

You’ll probably also be required to pay what’s known as a rent premium, or option money. This is an additional amount of money included in your rent payment that is set aside, to be used toward your eventual down payment. If you don’t decide to buy, in some agreements, the seller pockets this cash instead.

Read the fine print

Typically, you’ll agree on the purchase price in advance, when you sign the contract.

“The best way to draft a lease option for the tenant is to define a price, the owner agrees to that price,” and then both tenant and owner should factor in market appreciation as they settle on the price, Fuller says. When you’re ready to exercise the option to buy, you’ve already got money set aside for the down payment or closing costs, and if the property appreciates in value beyond what you offered to pay for it, you automatically have equity in the property.

“If the property has appreciated like what we’ve seen in recent years in the San Francisco Bay area and Sacramento County, then you automatically have equity at the time you close escrow,” says Fuller.

That’s because you already agreed upon a price at the time of signing the lease, “which may have been two, three, four, even five years prior,” he says. Homes in hot markets can appreciate a lot in that amount of time.

Don’t feel bad for the landlord, either; they’ve been renting to a tenant who has a vested interest in caring for the property. In fact, find out before you sign whether you’ll be responsible for maintenance costs while you’re renting there.

It’s quite common for the renters in rent-to-own situations to take on most of the maintenance, unlike in typical rental agreements. Since you may become the eventual owner, anyway, it’s to your benefit to make sure repairs and maintenance are done well and on time.

Go over your contract with a fine-toothed comb so you know exactly what’s expected of you and just what will happen if things do (or don’t) go your way when it comes time to purchase.

Terms for rent-to-owns are usually two years, and you’ll generally have one of two options: lease option agreement, or lease-purchase agreement.

A lease option agreement gives you the option to buy the house, while a lease purchase agreement requires you to purchase it. Lease purchase agreements are almost never a good deal for buyers. Make sure you know which agreement you’re signing because you could be locking yourself into buying the home down the line, even if your circumstances change.

Always worth a look

As you weigh the pros and cons of a rent-to-own, million-dollar home, remember that there is no one true path to homeownership. The important thing to do is to take the long view and make informed decisions.

That’s where your agent is really going to come in clutch: helping you understand the market you’re looking to buy in, the deal that you’re considering, and the longer-term ramifications of your potential investment.

With the right agent behind you, you may find an unconventional way to get into the home of your dreams, at a price you can actually afford.

Header Image Source: (R ARCHITECTURE / Unsplash)

Buyers with a limited or shaky credit history may face an even more arduous road to the closing table. Even if your monthly income is solid, lenders only have so much leeway when it comes to overlooking high amounts of debt, low credit scores, and patterns of missed or late payments.

Fortunately, creative solutions do exist for motivated homebuyers. In this piece, we’ll take a look at why a rent-to-own arrangement might actually be a viable option for certain types of renters, and we’ll share input from top real estate agents with decades of experience.

What is rent-to-own?

To briefly summarize, a rent-to-own agreement is a situation wherein a homeowner agrees to sell their house (or to offer the option to buy) to a renter after a certain length of time. This period is usually one or two years, but it can vary depending on the renter’s credit history and how close they are to eligibility for mortgage approval.

How does a rent-to-own agreement work?

As with most real estate contracts, specific rent-to-own terms may differ from one party to the next, but common stipulations include:

• The renter will pay a certain amount above and beyond monthly rental fees, which will be held by the seller to later apply towards the purchase down payment.
• The purchase price of the home is determined at the time of entry into the rent-to-own agreement.
• If the renter-slash-hopeful-buyer chooses to have a home inspection performed, this and subsequent repair or allowance requests may need to be carried out at the start of the agreement.
• The renter is often responsible for maintenance and repairs of the property from the date of move-in.
• There may be an additional fee or deposit that the seller keeps, regardless of contract outcome.
• The seller may have the right to keep a portion (or all) of the would-be down payment funds in the event of the renter failing to uphold their end of the agreement.

This may all sound a bit complicated — and rent-to-own agreements certainly can be — but outlining clear terms to which both parties agree to from day one can create a win-win situation for everyone involved.

Why would you want to rent-to-own?

Rent-to-own deals are not for everyone, but they can be a problem-solving option for certain buyers.

If you need to improve your credit…

For hopeful buyers whose credit history may have lenders feeling uncertain, the year or two spent renting your home can offer time to make significant improvements to your credit score.

And since there’s a legally binding paper trail, lenders may be able to take your rent-to-own agreement into consideration during your mortgage application process (assuming that you’ve been timely and paid in full on your rent every month, of course).

If you need to save for a down payment…

For some buyers, income and credit history may be in good shape, but a down payment is missing from the equation. Renting-to-own can offer an opportunity to get into the home you’ve fallen in love with.

Since a portion of your monthly payments will count toward the purchase of the property, rent-to-own can be a great option for renters who struggle to save money on their own.

If you need to reduce your debt…

Just as with improving a credit score, a rent-to-own scenario provides valuable time to help you improve your debt-to-income ratio (DTI). Lenders typically like to see a maximum DTI of 43%, including your mortgage payment, so your time spent renting is a great opportunity to focus on lowering your debts while simultaneously saving for your down payment.

If you know you’ll be in this home for the long haul…

Given the lengthy runway to purchase, rent-to-own is unlikely to be a good option for buyers who are only looking to stick around for a few years. If, however, you know that this home and neighborhood are where you’d like to live for the foreseeable future — factoring in job opportunities, school districts, quality of life, and so on — then the opportunity costs of rent-to-own may be worth your while.

There are ample pros and cons to this type of agreement, but, ideally, at least three of the four above variables should apply to you for a rent-to-own discussion to be on the table.

What to know before signing a rent-to-own agreement

Rent-to-own is sometimes referred to as lease-to-own, and you’ll likely encounter the phrases “lease option” and “lease purchase agreement,” too. The overarching premise is the same in that the tenant usually enters the agreement intending to buy the home, but there’s nuance that makes it important to differentiate between a lease option and a lease purchase agreement.

“Tenants have to understand that deposit money is deposit money, rent money is rent money, and option money is option money,” says Ed Kaminsky, a Los Angeles-based real estate agent with more than 30 years of experience.

Lease option

If you’ve rented before, you know the drill: Before moving in, you pay a security deposit that you’ll get back after move-out, providing that you’ve paid rent on time and you’ve left the home in good condition.

Monthly rent is, well, monthly rent.

Option money, then, is the additional fee you’ll pay — possibly as a flat rate, but more likely as an additional fee above and beyond rent each month — to grant you the option to purchase the house. In short, you’re paying the homeowner to agree not to sell the property to anyone else for the duration of your rental term, at the end of which you can either choose to purchase or move elsewhere.

The option fees you’ve paid will, in most cases, be kept by the seller should you decide not to buy. If you do move forward with the purchase, that money may be applied as a down payment, depending on how your agreement is structured.

Lease purchase

With a lease purchase, you’re committing to buying the house from the get-go. This scenario is perhaps the one that most people associate with the concept of rent-to-own, but if you’re moving forward with this type of agreement, it’s vital to sign on with confidence and know you genuinely want this particular home.

In either case, be absolutely sure that your rent-to-own contract spells out:

• What happens to your option or down payment fees in the event that one or both parties backs out of the agreement
• Who is responsible for the cost of home maintenance during your rental period
• What happens if you are late on rent (there’s a big difference between voiding the entire deal and losing a month’s fees toward down payment)

Seek expert guidance

Again, if this rent-to-own business sounds complicated, it’s not without reason. While most real estate agents do not specialize in working with rent-to-own buyers, if you can find an experienced agent to have on your side, they’ll help to make sure you understand what you’re potentially getting into.

If you can, taking the extra step of having a real estate attorney look over your rent-to-own agreement is always a smart move.

“I have seen more fraud occur with rent-to-own than you can imagine,” cautions Christina Griffin, a top agent of 20 years in Tampa, Florida.

“I’ve seen a lot of people lose a lot of money with a rent-to-own situation.”

Fraudulent rent-to-own incidents can occur when a homeowner chooses to stop paying their mortgage once they have a contract in place, if the house is already in the process of foreclosure at the time of rent-to-own agreement, if they fail to disclose major issues with the property (think structural problems, water damage, asbestos, and so on), if there are years of unpaid property taxes, or any number of other shady circumstances.

“It’s normally the out-of-the-box scenarios where I’ve seen [rent-to-own] work the best and limit fraud,” says Griffin, citing unique commercial properties and homes that are difficult to finance traditionally.

Rent-to-own for mutual benefit

Often, there’s little incentive for a seller to go the rent-to-own route. After all, why take a year or two or more to sell if a capable buyer is ready and willing to close in 30 days?

“I think sellers are considering [rent-to-own] when they’re having a challenge selling their home,” says Kaminsky.

In slow markets (which has not been the case with 2020’s housing market!), or when aiming for a lofty sales price, a homeowner may feel incentivized to consider a rent-to-own agreement. If a buyer comes along who “is not so challenged by the price but is challenged by the timing because they’re just not really prepared,” says Kaminsky, then a rent-to-own deal may be just the ticket to satisfy everyone.

But, as Griffin warned, be mindful when eyeing a house that needs repairs or renovation. Rent-to-own can be an enticing option for sellers who don’t have the cash to bring a dated home up to demanding market standards, and when met with a buyer who may have limited purchasing power, pesky details like home inspections and cost of upkeep are easily overlooked in favor of signing on the dotted line.

A successful rent-to-own transaction will benefit both buyer and seller, yes, but neither party should blatantly take advantage of the other.

How to find a rent-to-own home

Finding a rent-to-own property can be tricky. Most sellers are hoping to be under contract as soon as possible after listing their home for sale, and offering a lease option is unlikely to be top-of-mind even for homeowners with tricky sales conditions.

As ever, a good buyer’s agent can help you find potential rent-to-own homes — or skillfully propose the scenario to an open-minded seller. You can also utilize programs like Home Partners, Divvy, or Verbhouse, which work with buyers to purchase a house on your behalf, or match you with a suitable property already within their network, and then lease it to you with a right to purchase when the option to officially buy becomes a reality.

These types of services can be an especially valuable option in areas where the cost of buying a home is prohibitive, as they offer more flexibility and protection than striking a deal on your own.

“[These services] are a safe way to be able to secure your price and work with a reputable company and not have to worry,” says Griffin. “It’s a safer option because the liability is less.”

Know rent-to-own is an option, but proceed with caution

Homeownership has long been a mainstay of the American dream, and sometimes it takes more than working long hours and skipping $5 lattes to be in a position to buy a house. There’s no shame in needing extra time to build your credit or save up a down payment, and renting-to-own can offer a valuable lifeline, especially if you’ve found a property that is perfect for you and your family.

While you’ll be hard pressed to find a real estate expert who advocates for any variation of a rent-to-own agreement as the most ideal purchasing scenario, take heart in knowing that the opportunity does exist and that, under the right circumstances, it can be a worthwhile pursuit.

If rent-to-own sounds like a path you’d like to further explore, do your research. Like any potential buyer, you should educate yourself on the neighborhood, property values, and your financing options. Start by talking to a lender to gain a full understanding of where you’re at in terms of credit and what steps you’ll need to take to work toward securing a mortgage, and don’t hesitate to reach out to an experienced real estate agent for their local expertise.

But do understand that expert advice may not always be what you’d like to hear.

“Rent-to-own is great if it’s a weird property, or if it’s not financeable, or if it’s some type of unique commercial space, but there’s so much liability,” says Griffin. “With what’s happening in our world with forbearance and foreclosures and unemployment, I would never encourage anybody to rent-to-own unless [the seller] has no payments due and is free and clear on their home.”

Header Image Source: (Jack Prommel / Unsplash)

If you’ve decided a rent-to-own home could be right for you, you’ll want to make sure you’re clear on all the pros and cons. And you’ll need to understand the logistics for your specific arrangement.

Important among them: who handles any maintenance issues, and what are some biggies that might make you consider walking away instead of moving forward with this rent-to-own home? Our expert-backed primer covers all the maintenance questions buyers should be sure to ask about a rent-to-own home to help you avoid any difficult and potentially expensive situations.

Why do buyers need to worry about problems in rent-to-own homes?

Well, that’s a pretty simple question to answer.

“The biggest reason why buyers have to worry about rent-to-own home condition is because that home will be theirs, officially, once they own it,” says top-selling Florida-based agent Kathy Aparo-Griffin. “So they’re going to have to deal with these issues.”

The specifics of that rent-to-own arrangement “all depend [on] how the agreement is written,” Aparo-Griffin explains. One common (but not always standard) inclusion in a rent-to-own contract is asking the buyer to handle any repairs needed while they occupy the house.

This stipulation has an upside for the buyer, too: if they are “going to treat their home as if they already own it, then any roof leak, nonfunctioning AC, any of that is going to be a problem in the future when they go to technically own it and get a mortgage and get rid of the seller from the transaction,” the agent notes. Taking care of any maintenance issues proactively will benefit the buyers long-term when they become homeowners.

Indeed, Aparo-Griffin says, “usually it’s the buyer” handling these responsibilities and costs in a rent-to-own situation.

“If you’re doing a rent-to-own, you are technically a vested, soon-to-be owner. So you have to treat that place as your own. It’s always up to the real estate brokerage firm that’s writing up [the rent-to-own agreement] to clarify that, but for the most part, it’s usually on the buyer.”

However, that’s not always the case. “I have written up some rent-to-owns where the seller is responsible up until a certain time period when the buyer actually gets a standard loan,” Aparo-Griffin says. So you have options!

Standard maintenance issues for buyers to expect

Every home comes with standard maintenance matters that owners — or owners-to-be — should keep top of mind.

Here’s a general list of things to think about.

Cleaning out the gutters

Who’s responsible for doing this, and when will it be done? Homeowners should remove any debris from their gutters and clean them out annually.

Clogged gutters can lead to roof damage — an expensive repair — so this ounce of prevention can save buyers significant money long-term.

Replacing air filters

Who performs the task, and who pays for the filters? Air filters range in price depending on the size and thickness of the filter. Thinner filters are supposed to be replaced monthly, while thicker filters can last up to a year (and are more expensive).

Dirty air filters waste energy because your systems have to work harder; they can even cause your HVAC system to overheat or malfunction. And, of course, replacing air filters will maintain good air quality in your home.

Maintaining landscaping

This may include mowing and watering the lawn, and generally keeping up the landscaping around the property.

Is this the responsibility of the buyer or the landlord, and at whose expense? Is there a professional service that handles this, and who arranges and pays for it, if so?

Landscaping isn’t simply a matter of curb appeal. Paying attention to how water drains around the home when you’re watering the lawn, for example, can alert you to structural issues with the house before they become acute.

Cleaning the fridge coils 

First, you’ll want to establish whose fridge it even is: will it eventually come with the house and pass to the rent-to-owner if it belongs to the seller?

Cleaning the fridge’s coils helps the fridge operate at maximum efficiency, so maintaining this part of the house will save the renter and future buyer money on their energy expenses. Plus, if the fridge is coming with the house, buyers will want to make sure it’s operating at peak condition, anyway.

Clean the dryer vent

Again, who owns the appliance in the long run, and who is responsible for it during the rental period? This is another example of a fix that can save buyers money on their energy bills, but backed-up lint and debris in dryer vents can also start fires. For $11 on Amazon, you can order a vacuum attachment to help you handle this maintenance job.

Other standard maintenance tasks

Other tasks for which to establish responsibility include such home maintenance issues as:

• Servicing the furnace (annually)
• Flushing the water heater (annually)
• Touching up exterior paint (as needed)
• Caulking windows (as needed)
• Minor plumbing repairs (as needed)

Major maintenance issues that could change the game

Aparo-Griffin says she’d likely write in the contract that all of the maintenance issues under a certain dollar amount would fall to the buyer.

But that said, there’s a limit to what a buyer should be expected to handle in terms of home maintenance, she adds.

“Obviously if the roof is bad, you can’t expect somebody who’s renting to own to pay for a $10,000 roof.”

(She adds that if the parties do agree that buyers will be shouldering major home-maintenance responsibilities, the buyer must waive or remove any existing inspection contingencies prior to taking possession of the property.)

Let’s further consider that roof example.

“Some of the major issues that we run into a lot in Florida are that we have problems with roofs all the time because of hurricanes, hail, tornadoes, you name it,” Aparo-Griffin says. “You could need a whole new roof. You could have a leaking roof. I was in a house two weeks ago where water was pouring down the wall in the garage.”

So fundamentally, “the roof issue is a big one,” she explains — the biggest rent-to-own home maintenance concern, in her assessment. “You have to make sure you have a good roof because at the end of this, when the buyer goes to get financing, the buyer’s not going to be able to do that if the roof is an issue.”

Lenders want to confirm that the house is safe to occupy, and buyers who are hoping to get a VA or FHA loan for the house will need to ensure the house meets FHA or VA standards for safety and condition, too.

In short, examining potential costly future issues (especially the roof) “is probably the most important thing that needs to be done before you execute a rent-to-own contract.”

What are some of the other major issues that might make a would-be buyer want to walk away? Think extensive electrical issues, expensive plumbing repairs, widespread window or door replacements, or an HVAC system that needs extensive repair or even replacement.

What else to know about rent-to-own home maintenance

The home should be on a service plan during the rent-to-own term, which is in both the seller’s and the buyer’s best interests.

“You should have a once-a-year maintenance check and specify who’s going to pay for that, so as a seller you know your investment is protected,” Aparo-Griffin explains. “You know the buyer’s not going to get in there and run it into the ground.”

Remember that while the rent-to-owner is renting, the seller still owns the property. So the seller must carry homeowners’ insurance, and both parties will want to specify who’s going to pay the insurance deductible.

“If it’s a rent-to-own, the most the buyer could get is a rental [insurance] policy,” Aparo-Griffin notes. “But the homeowner still has to have homeowners’ insurance. If there is a fire, if there is a claim, if there is a hurricane, the buyer can’t make a claim. It’s not their home yet.”

So make sure to button up that insurance issue as one part of the essential home maintenance matters you’ll definitely want to clarify when entering into a rent-to-own home arrangement.

Header Image Source: (Curtis Adams / Pexels)

There are other options out there to help you achieve your goal. You’ve heard of rent-to-own homes, but don’t really know much about how they work. Does a rent-to-own home build credit? The answer isn’t as straightforward as it might seem.

This article will walk you through the possibilities offered by a rent-to-own agreement, as well as provide data and professional insights, to help you decide for yourself whether it’s for you.

An overview of rent-to-own

A rent-to-own agreement involves renting a home for a set period of time with the ultimate end goal of buying the home from the owner/seller. On top of the rent, you often pay an extra fee that is sometimes applied to the purchase price of the house as a down payment when the time comes for you to buy it.

After the predetermined amount of time has passed, you have the option to buy the home. Rent-to-own agreements use two different types of lease agreements: lease-option and lease-purchase. The agreements are similar, but differ on a key point.

Lease-option agreement

A lease-option contract gives you the option to buy the house once the lease expires. If you decide against buying the house, the option expires, and you can walk away free of any obligation. If you’re going to do rent-to-own, this is the lease you want.

However, be aware that you’ll lose any investment you paid into the house. The seller will keep any money paid on top of the monthly rent that was intended for a down payment on the house.

So, the longer you stay in a rent-to-own, the more money you’ll lose if you choose to walk away.

Lease-purchase agreement

Watch out for these types of contracts. In a lease-purchase agreement, you are required to buy the house at the end of the lease.

“Be sure to review everything and know what you’re getting into,” advises Norris Bishop, a top-selling real estate agent in Georgia with more than 17 years of experience. He suggests working with an agent who can review the contract for you.

“I’ve heard of and seen contracts that weren’t fair to the would-be buyer. Without a professional to check over the contract, you could end up signing an agreement that has an overly strict clause. For example, you might overlook a clause where, if you were late on your monthly payment once, you forfeit your deposit.”

The process

Before you sign your rent-to-own agreement, you’ll need to determine when the purchase price of the home is to be decided. In many cases, you’ll want the purchase price locked in before signing the contract. This is especially true in a real estate market where the home might appreciate at a higher value in a couple of years.

Low mortgage rates can help a little to offset rising house prices, but mortgage rates can fluctuate on a weekly basis.

All of that means that if you’re shopping for a rent-to-own home right now, you’ll probably want to opt to lock in the purchase price as soon as you can.

The other option is to add a contract clause where the price won’t be decided upon until the lease expires. You’ll pay the home’s market value at that point.

Either way, it’s a good idea to get the home appraised to ensure you have an appropriate estimate of the home’s value and make it easier on yourself to get approved for a mortgage when the time comes.

“You need an independent, third-party opinion on the worth of a home,” says Dave Smith, owner of AppraisalSmith of Kansas City. He’s been certified and working as an appraiser for over 15 years. “Having an appraisal done safeguards people from overpaying on a house.”

Smith states that some homes appraise for below the estimated value. In fact, around 10% of all homes appraise below the expected home price. He notes that when a home under-appraises, it isn’t always bad, at least for the would-be buyer. It gives you the chance to renegotiate the contract and can save you money if the seller agrees to lower the purchase price.

Once the price is set and you’ve signed your rent-to-own agreement, you generally must pay the seller a nonrefundable, upfront fee. This fee is often referred to as an option fee.

The option fee is what gives you the right to buy the house once the lease ends in one to five years. The amount you pay typically ranges between 2.5% and 7% of the home’s purchase price. A favorable contract will apply some or all of your option fee to the purchase price when the lease ends and you’re ready to buy.

As the name implies, you’ll obviously pay monthly rent to live in the house. However, every contract differs in terms of how much extra you must pay each month, as well as what percentage of that payment goes toward your home purchase.

You’ll want clear terms laid out in the contract showing where the option payment is going. It’s possible for a seller to have you pay an additional $200 each month and only apply $100 of it to your home purchase.

Ideally, you’ll negotiate a contract where most of the extra money you’re paying on top of rent goes into an escrow fund toward buying the house. Once the lease ends, you’ll then be able to secure a mortgage and buy the house.

If you decide to walk away from the agreement, you’ll unfortunately lose both your option fee and the monthly fee you were paying. This can add up to a monumental loss depending on how long you stayed at the house.

What’s the credit advantage of going the rent-to-own path?

Simply put, a rent-to-own home gives you the time you need to build up your credit score.

The higher your credit score is, the better deal you’ll be able to secure on the mortgage loan. Lenders give people with excellent credit scores far better interest rates, which translates to you paying less over the life of the loan.

As a rule you should aim to have a credit score of at least 620. The better your credit score is, the more options you’ll have for the types of loans you can get.

So how do rent-to-own homes build credit?

There are two different ways a rent-to-own agreement helps build your credit before you apply for a mortgage.

First, ask that your rent is reported to the major credit bureaus.

Bishop suggests you add a clause in the contract that requires the owner to report your payments to the credit bureaus.

“Always pay with a check as well. That way, there’s a clear trail and it can be documented.”

The second step involves doing everything in your power to improve your credit score.

Consider establishing multiple lines of credit. If you can, take out a loan or diversify the types of loans you have. For example, if you already have credit cards, look into a car loan if your monthly budget will allow one.

If you have any high-interest debt, you’ll want to focus on paying it down. Having too much debt can affect your chances of qualifying for a loan.

Throughout the course of your rent-to-own agreement, you should strive to build up a savings account. This savings account should be to help cover the closing costs you’ll have to eventually pay.

Most importantly, pay all of your bills on time every month. A single late payment can drop your credit by as much as 90 to 110 points. That’s a steep hole to climb out of!

If you do everything correctly, by the end of your lease agreement, your credit score should be in stellar shape.

The verdict: Does rent-to-own help your credit?

A rent-to-own home doesn’t directly build your credit. It’s the steps you take throughout the term of the lease that will help to boost your credit score.

Bishop says to “stay diligent.” As long as you’re receiving credit for your monthly rent payments, you’re building capital. You have far more stability with a rent-to-own home than with regular renting.

Keep a close eye on your credit score, get credit lines, and pay your bills on time and you’ll get your foot in the door of homeownership by the time the lease ends. If you’ve done what you should throughout the lease, your credit score will be in such excellent shape that you’ll get far better rates on your mortgage interest rate than you would’ve beforehand.

Last, hire an attorney or work with a top real estate agent so that you have a professional who can look over the contract and watch out for your best interests.

Header Image Source: (E Photos / Pexels)

Sometimes, the best option to get into the home of your dreams is a rent-to-own deal. However, rent-to-own contracts have unique components that you might not see in other real estate agreements. So, what are typical rent-to-own terms and conditions?

The terms

1. Is your contract a lease option or lease purchase agreement?

The first important thing to understand about your rent-to-own terms is whether you are entering into a lease option or a lease purchase agreement.

With a lease option, you have the option (but not the obligation) to buy the home you are renting when the contract is up. According to the National Association of Realtors website, lease-option agreements (aka rent-to-own) are generally utilized in residential real estate deals when a homebuyer would like to purchase a home, but needs to repair their credit rating in order to secure a promissory note and mortgage.

With a lease purchase agreement, you are legally obligated to buy the home when the contract is up.

A lease purchase agreement, however, “isn’t in the best interest of the landlord or anyone selling property, and it isn’t something I would ever advise any of my clients to do,” says Erick Monzo, a top-selling real estate agent in Detroit.

2. What is the upfront fee?

When you enter a rent-to-own contract, you likely have to pay the seller of the home a one-time upfront fee — which is usually nonrefundable. This money is called the “option fee,” and it is what gives you the option to buy the home you are renting in the future.

Keep in mind that the fee is negotiable, though it usually ranges between 2.5% and 7% of the agreed-upon purchase price of the home. You should ensure that it is clearly outlined in your contract whether or not the upfront fee will get applied to your down payment.

3. How much will you pay for rent? 

Just like a typical lease, a rent-to-own lease will outline the rent price in the contract. It might also outline a rent credit (a percentage of rent that the owner gives back to the renter through an escrow account because they are renting-to-own) and any additional money you will pay every month that will go toward the purchase price of the home (the down payment.)

But Monzo warns renters interested in rent-to-own contracts to enter into this type of agreement with eyes wide open. For example, rents of $1,000 per month can easily turn into a payment of $1,250 per month with a rent-to-own agreement. This is called a rent premium.

“The additional money would be deposited into a third-party escrow account,” explains Monzo. “That money accumulates, and at the end of the contract it can be used toward a down payment.”

That sounds good so far, right?

But Monzo warns that if the rent-to-own option falls apart (for example, you find you can’t secure financing to buy the house), the landlord may be able to keep all of the extra money you’ve been paying — and you still aren’t a homeowner.

4. How much will the home cost?

Just as the cost of rent will be outlined in the contract, the price of the home should be stipulated as well. Take note that the cost to purchase might be a bit higher than the current market value in order to accommodate price growth.

“If you are going to enter into a rent-to-own contract or a first right of refusal within a traditional lease, make sure you get the purchase pricing right,” warns Monzo.

Many people who enter a rent-to-own contract don’t discuss purchase price with the landlord upfront, and this comes back to bite them later.

“Let’s say you have everything ready to go and you’re ready to buy the house and then the landlord says, ‘Great, let me get the house appraised,’ explains Monzo.

“The landlord might decide to sell the house based on the value today, not the value two years ago when you signed the contract.”

In other words, make sure you come to an agreement on the price of the house and that the agreed-upon price is stated in the contract.

5. Maintaining the property

Before you sign a rent-to-own contract, make sure that terms around property maintenance are clearly defined.

“Every landlord does things differently,” says Monzo. You’ll want to make sure that you and the landlord agree on who will be responsible for fixing something if it breaks, who will maintain the lawn, and who will keep up on the routine maintenance of the home, like having the systems in the house serviced.

And, as always, make sure that these aren’t just verbal agreements — they need to be outlined in the contract.

6. Additional expenses

Owning a home comes with many fees, some of which might be a surprise to you if you are renting-to-own. Ask the landlord if there are additional expenses, like a homeowners association (HOA) or road maintenance fees — and if there are additional fees, make sure your contract outlines who is responsible for paying them.

Likewise, make sure that you and your landlord are clear on who will be responsible for paying the property taxes and homeowners insurance on the home during the rent-to-own period.

7. Other conditions

Make sure you go over your rent-to-own agreement with a fine-toothed comb and consider employing a lawyer or real estate agent before you sign on the dotted line. Without experts who are trained to keep your best interest in mind, you might find yourself beholden to stipulations and conditions that affect the terms of your contract.

“Renting-to-own gives you no more vested interest in the ownership of the home than a traditional lease will,” Monzo says. “Basic eviction laws still apply.”

Keep in mind, too, that if the option to buy is not exercised at the end of your rent-to-own contract, you will likely lose the option fee you paid and the rent premium.

8. Renewal terms

It’s incredibly important that your rent-to-own terms lay out the specifics around renewing your contract if you aren’t ready to purchase the property when the contract is up. What happens, for example, if you still want to purchase the home but need a few more years to save? If you don’t have a renewal option in the contract, you could lose all of the money you’ve already put toward the home.

9. Other rental agreement details

Monzo points out that every landlord draws up the contract in a different way — some of those are legal and others are not. “One landlord may have a lawyer draw up a contract; another goes on Google and finds a contract; another decides to type it up themselves,” says Monzo.

As a result, some additional rental agreement details are legal, but some are not. For example, “a landlord may say that having a pet is a cause of eviction, but state law does not enforce that,” Monzo says. “Landlords interpret the law in their own way; they are not lawyers. A lot of them put things in a contract that are not even legal.”

Monzo recommends making sure that your landlord uses a real estate agent with board approved-forms because they take out any hidden clauses and language that is hard to decipher. “You’ll know 100% that the information in those forms is legal,” he says.

Other options

Monzo says that while signing a rent-to-own contract might sound appealing, it’s not the typical way a homeowner goes about purchasing a home. By his estimate, rent-to-own contracts add up to about 5% of the leases he deals with.

“There are some landlords that only do rent-to-own. That is their business model, and that’s okay,” says Monzo. “But when you are dealing with an agent, our job is to look out for our clients and protect them.”

Header Image Source: (Jacques Bopp / Unsplash)

Sounds great to you — but what about from the seller’s perspective? How does rent to own work for a seller, and why would they sell their house this way?

Why would a seller want to rent-to-own a house?

Understanding a seller’s motives can help you figure out whether this particular rent-to-own deal is for you. Sellers can have many reasons for entering into a rent-to-own agreement rather than selling outright.

The market could dictate a rent-to-own sale

The market could be the reason a seller might want to rent-to-own a house. Matthew Le Baron saw this when he was an agent from 2008 through 2011 in the Boise area. “If an owner was underwater and couldn’t sell,” he says, “They rented the home out and gave people the option to purchase. You’ll see more rent-to-own properties in more of a down market, more of a buyer’s market.” For whatever reasons a seller might want or need to move, a rent-to-own deal makes it possible.

Financing options could lead to a rent-to-own sale

If it’s tough for buyers to get financing right now, the seller might have trouble finding someone to buy the house. It’s possible that buyers in the area are experiencing credit issues, or perhaps they don’t have a down payment together. In those circumstances, the seller might choose to do a rent-to-own.

In Le Baron’s opinion, “People that are going down this path have limited credit or a limited down payment but still want to technically own their home.” If a seller lives in a city going through an economic downturn, which has led to less-qualified buyers — but the seller still needs to move — a rent-to-own helps both them and a buyer.

House or property issues

In other cases, the house or the property is the issue. Kelly Springer, a partner at the firm Willenbring, Dahl, Wocken, & Zimmermann, has handled many contract-for-deed transactions. She says that the most common reason she sees sellers choosing to rent-to-own is for “farm real estate or family transfers. Farms, as a business, run in the red a lot. With new underwriting requirements, post the last recession, the bank can’t finance it.”

An unusual property that has no true comparables in the neighborhood or a residence that’s also a business could prevent a buyer from obtaining financing. If you’re confident that the farm or business would show a profit in a few years and you could buy it outright then, a rent-to-own might make sense.

An older home

Maybe the seller knows that their home can’t compete with other homes in the area on the open market. If those homes have been updated, but still aren’t selling quickly, the seller might worry that listing their home without upgrades would be pointless. An elderly seller might not want to make repairs if they’re retiring and downsizing; another seller might not have the money.

While you might think you’d get a deal for a home that hasn’t been updated and is a rent-to-own, that isn’t always the case. If you have poor credit, you represent a greater risk to the seller; if you miss your monthly rent payments, they could struggle to pay the mortgage. Even if the home isn’t in as good a condition as others in the area, you could still pay the same price for it.

This is a scenario where a rent-to-own sale works for the seller, but buyers should still perform their due diligence on the property. Springer says that one of the biggest mistakes she sees rent-to-own buyers make is that they’re “not thinking about some of the things you’d normally do as a buyer of normal real estate; they’re not thinking about title work or inspection.” But if you get all the way to financing the house, and there’s an issue with the title, you could lose your deposit. Treat buying a rent-to-own property just like a normal sale and have all inspections and title work done.

Paying too much for a property in the rent-to-own agreement could lead to an inability to finance it in two years. As the buyer, you’re betting on price appreciation, but Le Baron has seen instances where a buyer agreed to a purchase price of $100,000, the market dropped during the rent-to-own period, and the buyer couldn’t get an appraisal for $100,000 when it came time to get a mortgage and buy the house.

Seller wants regular income

Some sellers would prefer to establish a steady stream of monthly income for a time. A retiree could view a monthly revenue stream in the form of rent as a more attractive option than a lump sum payment. For tax reasons, collecting a balloon sum later could help them save money or better plan for their retirement.

How does rent to own work for a seller?

Sellers still have to find a buyer and agree on terms. While they’ll likely have to pay legal fees, they could avoid a real estate agent’s commission if it’s a transaction between family members. Typically, the final contract needs to address the home’s final price, monthly payments, and what will happen during the contract’s term.

Types of rent-to-own agreements

There are two common forms of a rent-to-own agreement; a lease option or a lease-purchase agreement.

A lease option combines a traditional rental lease with the option to purchase the home later. Your option fee could be 1% to 2% of the home’s eventual purchase price. It only locks in the price, and you’ll likely have to pay a down payment on top of the option fee.

Under a lease-purchase agreement, a portion of your rent typically goes toward the down payment. Because of this, you may pay higher than market rent. When a lease-purchase agreement ends, you must buy the property.

Lease options usually work better for buyers because they’re not obligated to buy the property at the end of the contract’s term. If, after living in the house, you’ve decided that you don’t like the neighbors, the price is too high, or the crime rate has gone up, you can walk away.

Pricing a rent-to-own home

When the buyer and seller decide on a price, will it remain static for the contract’s term, or will it increase 5% to 10% to adjust for price growth? There is risk either way; if the price doesn’t increase, the seller could end up losing money if the home gains a lot in value, if it does increase, the buyer could be locked into paying too much for the house.

Buyers with poor credit should not expect to get a bargain on a rent-to-own. Your lower credit score represents a higher risk to the seller. The price and fees they charge you will reflect a desire to hedge their risk.

Option fees and rent-to-own

How much will the seller charge for the option fee? Similar to a down payment, the option fee gives you the right to purchase the house at the contract’s end for the agreed-upon price. This money isn’t refundable, and if you default on the contract’s terms, the owner can keep it.

Payments on rent-to-own contracts

In addition to deciding on a rent payment, your agreement should specify to whom you should pay your rent. “If the owner misses a monthly payment, the property could be foreclosed upon even if the buyer has been making their payments,” warns Le Baron. He typically advises buyers to “make payments to a long-term escrow company” to protect their investment and ensure that the home’s mortgage remains current.

When discussing the rent payment, the seller may want to include a rent premium. A rent premium is the amount you pay above market rent. As a buyer, you want to know if the premium is applied to your down payment. This could be an easy way for you to save up the down payment to finance the home into your own name, particularly if you struggle to maintain regular savings habits.

Insurance, taxes, and repairs

Clarify if the payment wraps in insurance and taxes, or if you’ll be responsible for those, too. If the seller’s lender requires that they put these funds in escrow, your only worry is that they stay current on their mortgage.

If the roof leaks or a pipe breaks, who’s responsible for having it fixed? Since the owner isn’t a true landlord, they could decide that the buyer must take care of all maintenance and repairs. This represents a risk to you, the buyer. If you’re unable to buy the house outright at the contract’s end, any money you spent on repairs or improvements has benefited only the seller.

Late payments on a rent-to-own

Lastly, what happens if the tenant is late on a payment? While a grace period for late payments is rare, if she’s negotiating on behalf of the buyer, Springer tries to get the owner to accept one. She also advises buyers to “try to wrap in a dispute resolution or notice before the owner starts cancellation.”

If a grace period isn’t stipulated in your rent-to-own contract, then a late payment can void the contract entirely, so don’t ignore this clause.

How long does a rent-to-own contract last?

A two-year agreement is standard for a rent-to-own contract. The idea is that, at the contract’s end date, the buyer will have fixed their credit or saved up a high enough down payment enough to qualify for a mortgage, or the house will have gone up enough in value to appraise.

If you can, try to get a contract extension built into the agreement. Perhaps you can add six months to a year onto the term if you pay an additional option fee, preserving your original investment if you’re still unable to get a loan. From the seller’s perspective, they have little to lose if they agree to this clause, but it provides you some additional protection.

Is rent-to-own right for you?

If you don’t have a full down payment, or you’re still repairing your credit score, renting-to-own your residence could be a great way to ease your way into homeownership. You won’t feel like you’re wasting money on rent, and you could fix things up and make it your own.

Be honest with yourself about whether you’ll improve your credit score by the time the balloon payment comes due. If you have doubts, talk to a real estate expert and get professional advice. You are entering into a contract that has financial and legal ramifications — but one which could eventually help you achieve your dream of homeownership.

Header Image Source: (Ismaili Fjori / Pexels)

We talked with real estate professionals who specialize in the rent-to-own process in order to get an insider’s look at how to navigate the rent-to-own market from a buyer’s perspective. Their expert knowledge brings clarity and understanding to what could otherwise be a confusing transaction.

What does rent-to-own mean?

Basically, a rent-to-own real estate purchase means that you can live in the house as a renter with the intent to close on the home at a date in the future.

Amani Warden, a real estate agent with years of rent-to-own experience in Tampa, Florida, says it’s important to realize that there are two different types of rent-to-own contracts.

• Lease option: This type of contract gives the tenant the exclusive opportunity to buy the property at the end of the contract term.
• Lease purchase: This type of contract requires the buyer to purchase the property at the end of the contract term.

Lease options typically require less of a financial commitment upfront. Essentially, you are paying for a first right of refusal in a lease option agreement.

Lease purchases, on the other hand, could be viewed like a traditional real estate purchase with a delayed closing date. Lease purchase agreements usually require a significant (up to 20%) investment upfront, and you are obligated to buy the house when the lease is up.

What are the steps in the rent-to-own process?

Step 1: Locate the right opportunity

Rent-to-own properties are advertised through traditional listing channels, so the best way to connect with good opportunities is by enlisting the help of a trusted and experienced real estate agent. Sure, it’s possible to dive in alone, but with the nuances of a lease purchase or lease option agreement, it’s helpful to have someone on your side.

Brenden Rendo, a real estate agent with rent-to-own expertise in central Florida, including Orlando, emphasizes the importance of working as a team with your real estate agent. “The biggest thing is making sure you have a plan,” he says.

There’s a set end-date for each contract, whether lease option or lease purchase, so you’ll want to be sure that by the time the contract is up, you’re in a position to fulfill your end of the agreement. Credit, savings, debt, income — all of that will play a role. Rendo says you need to be transparent with your agent and ask, “What do I have to do to buy this house?”

Your agent can also help vet any rent-to-own opportunities that you find. They should be able to ask the seller some qualifying questions regarding past tenants’ references, any previous rent-to-own deals, and the closing success rates for prior contracts.

In today’s market, there are plenty of private sellers and investment companies that work to provide fair deals, but there are also plenty of rent-to-own scams, unfortunately. Having an ally in your corner is the key to locating the best deal for you.

Step 2: Negotiate the contract

Once you’ve found the right rent-to-own property, you’ll need to sit down and go over the details.

As with any contract, the finer points can be negotiated to varying degrees. Watch for these keywords, and make sure they work for you:

• Premium payment: Also called an option fee or option consideration, this is an upfront payment that will be credited toward your down payment.
• Term: The time limit of the agreement, typically one to three years.
• Purchase price: The price you will pay to own the home. This is typically slightly higher than current market value to adjust for inflation and motivate the seller.
• Rent credit: Any portion of your monthly rent payment that gets credited toward the final sale as a down payment.
• Renewal clause: An option to extend the term for a set period of time.
• Maintenance clause: Details regarding who is responsible for repairs on the property.

In addition, you’ll want to have any inspections, appraisals, and testing done prior to signing the contract. Remember, the end goal is a real estate purchase. So whether you’re looking at a lease purchase or a lease option, it’s best to do your due diligence before getting too far.

You may also want to consult a real estate attorney to look over the contract. They can help define any terms and ensure that everything is in your best interest before signing on the dotted line.

Step 3: Pay the upfront fee

You’re sure that this is the house for you. The contract looks good. Now it’s time to make the premium payment.

Often, premium payments are non-refundable (though this too can be negotiated in some cases), so you’ll want to feel completely at ease with the deal prior to this point. The premium payment should count toward your down payment when it comes time to close on the home.

For a lease option agreement, the upfront fee usually ranges between 2.5% and 7% of the purchase price. For a lease purchase agreement, Warden says that the premium is usually around 20% of the purchase price since this type of contract requires more “skin in the game.”

Step 4: Pay rent

After the upfront premium payment, the only thing left to do is move in and pay rent like a regular tenant. If there is rent credit built into your contract, your monthly rent payments will likely be higher than the market average in order to account for the portion your landlord/seller is putting toward your purchase price. For example, if fair rent in your neighborhood is $1,500, and your rent credit is $500, then you can expect to pay $2,000 per month.

Take care not to be late on any monthly rent payments. In some agreements, one late payment can negate the whole contract. That means you could stand to lose any nonrefundable money invested. Plus, late payments could count against your credit score, which will need to be in top shape at the time of final purchase if you plan to get a mortgage loan.

What happens after I move into a rent-to-own property?

Once you move in, you can basically relax and settle in. But it’s important to be mindful that the property is not yours yet. That means you’ll want to hold off on any upgrades or renovations that can’t be taken with you in the event that the deal somehow falls through.

For instance, it’s okay to invest money in that sleek refrigerator you’ve been eyeing (since it can be moved), but you do not want to add crown molding or change the shower tile.

As far as maintenance and upkeep, contracts vary in terms of responsibility. In lease purchase agreements, it’s more common for the buyer to be on the hook for any repairs and maintenance, while in lease option agreements, the seller/landlord will generally take that on. Sometimes an agreed-upon dollar limit is imposed — for example, anything under $500 will be covered by the tenant/buyer, and anything $500 and over will be the responsibility of the landlord/seller.

Because the seller still owns the property for the term of the contract, they will pay the property taxes, homeowner’s insurance, and HOA dues. You should, however, get renter’s insurance to cover your own personal property within the home. Renter’s insurance typically costs between $114 and $262, depending upon your location and coverage options.

Your No. 1 concern while you’re under contract should be doing whatever is necessary to get yourself to the closing date.

Remember that plan you developed with your agent? Now is the time to implement it. Sit down with your mortgage specialist. Pay down credit card debt (to get your debt-to-income ratio below 43%). Set aside money for a larger down payment in an effort to decrease PMI (private mortgage insurance) payments and decrease your rate and monthly payment overall. Whatever your personal plan entails, it’s important to follow the steps carefully and keep that end goal in mind.

What happens at the end of my rent-to-own contract?

At the end of your contract term, you’ll apply for a mortgage like any other buyer. The house won’t ever be listed for sale on the market, and the purchase price should already be defined in the contract, so at this point, it’s just a matter of finalizing the transaction.

When applying for your mortgage, make sure that your lender is aware of the complete situation. You want to provide documentation for the premium payment and rent credits that have already been given to the seller, in addition to the original purchase contract, the original appraisal (if you got one), and any inspections that were made. You’ll probably also need to obtain another appraisal. If the purchase price is significantly higher than the appraised value, you’re going to need to renegotiate with the seller or come up with the difference, since a lender will likely not approve the loan at too high of a loan-to-value (LTV).

After the closing is complete, the house is officially yours! Congratulations, homeowner!

Both Warden and Rendo agree that rent-to-own scenarios can be beneficial for buyers in certain situations. However, they’re not for everyone. Talk with your agent, and consider all the pros and cons of a rent-to-own contract, in order to make the decision that’s right for you.

Header Image Source: (Pixabay / Pexels)

All product names, logos, and brands are property of their respective owners. All company, product and service names used in this website are for identification purposes only. Use of these names, logos, and brands does not imply endorsement or any affiliation with HomeLight.

We talked with Maureen Connolly, an agent with 17 years of experience in New York, and Brad Korb, a top-ranked agent in Burbank, California, in order to uncover all the advantages and disadvantages of a rent-to-own real estate purchase. With the help of their professional advice, you can assess your personal risks and determine if rent-to-own is in your best interest.

What is rent-to-own?

Renting with the purpose of owning your own home comes in two flavors.

A rent-to-own deal, also known as a lease option agreement, allows buyers the opportunity to purchase a home after a specified amount of time while in the meantime living at the property as a tenant.

A lease purchase agreement requires the renter to buy the home when the lease is up; lease purchase agreements come with a lot more catches than lease option agreements, and buyers should approach lease purchase agreements with caution. For the purposes of these pros and cons, we’re going to be looking exclusively at lease option agreements.

Rent-to-own contracts can be negotiated to fit the needs of both the buyer and the seller, but a typical contract should include:

A premium payment

This is also known as an option fee or option consideration and is a non-refundable, upfront payment which locks in the price of the home and ensures that the tenant has the first option (not obligation) to purchase the home on or before the agreed-upon date.

A typical premium payment is between 2.5% and 7% of the agreed-upon purchase price.

A term (or time limit) 

Contracts can stipulate any amount of time, but the typical range is between one and three years.

A purchase price 

The contract will set a fixed purchase price of the home. This number might be a little higher than current market value because the seller needs some kind of motivation to wait several years to sell rather than selling now.

A rent credit 

This is the amount of your rent that gets credited toward the final sale. For instance, if your monthly rent payments are $1,400 for two years and your rent credit is $200, you’ll have $4,800 already paid toward the purchase price at the end of the term.

Often, the monthly payments are higher than the average rental market to account for the credit. Note that rent credit is usually also non-refundable.

A renewal stipulation 

The rent-to-own contract needs to define whether or not the renter/buyer has the option to extend the terms of the contract, if needed, and for how long.

A maintenance clause

Whose responsibility is it if the bathroom light goes out? What about the bathroom plumbing? Some buyers and sellers set a dollar limit — such as, the buyer will fix anything under $500, and the seller will pay for anything over that amount. But local laws govern these details to varying degrees, so contracts can look different.

Tips for would-be rent-to-owners

Connolly says that rent-to-own contracts should be taken on a case-by-case basis, and a good agreement needs to work for both the buyer and the seller. If you’re considering a rent-to-own scenario, be sure to:

• Consult a real estate lawyer: A professional will be able to go over the contract with you to help translate terms and watch for details that may not be in your favor as a buyer.
• Get a home inspection: Korb tells buyers to consider a rent-to-own contract “like a long escrow,” meaning it’s important to enter the contract in the same way as you would any other home purchase contract. That’s why you should insist upon a full home inspection. You don’t want to find major problems after you’ve invested money via premium and rent credit payments, especially since the seller is not obligated to fix them.
• Talk to your lender: Go over the situation and get their professional opinion about whether this contract is in your best financial interest. Ask about the likelihood of obtaining the mortgage loan you’ll need at the end of the rental period.
• Get seller’s disclosures: This, too, is a normal part of a home purchase, and your agent can help with this portion. Similarly, look into any insurance claims and make sure the title is clean.

Rent-to-own: The pros

Gain peace of mind

With rent-to-own, you can find the neighborhood of your dreams and get your foot in the door. It’s an opportunity to lock in your ideal living situation before you may otherwise be able to. Plus, you don’t have to worry about the price of homes skyrocketing past what you can afford.

Important if: you intend to stay in the area for a long time and are worried about price growth outpacing your ability to buy.

Don’t worry about credit

Many landlords and rent-to-own sellers accept lower standards of credit than mortgage companies. Landlords tend to look in the 600 to 620 range. Lenders tend to look in the 620 to 660 range at minimum, but better rates are given to those with better credit numbers. (The exception would be FHA loans, which can be obtained with credit scores in the 500 range.)

Important if: your credit took a recent hit, but you’re in a position to rebuild it in a few years’ time. 

Build purchasing equity

The rent credit portion of the deal helps you save money towards the eventual purchase price of the home. Note that this is not the same as traditional equity because you are not yet the homeowner. As far as purchasing equity, you can think of it as investing in your future rather than investing in a home.

Important if: you tend to spend money that’s in the bank. Rent credit is money saved that cannot be touched. 

Lock in your purchase price

As previously mentioned, a rent-to-own contract should spell out the final, agreed-upon purchase price of the home. Though it may be a little higher than current market value, in a rising market, that locked-in price could work to your advantage later when it’s time to finalize the deal.

Important if: you anticipate a rise in housing prices in your neighborhood.

Eliminate buyer’s remorse

Rent-to-own could be considered a “try it before you buy it” scenario. Not sure if you’ll like a split-level layout? Wondering if you’ll be able to keep up with pool maintenance? Questions like these don’t need to be answered right away with a rent-to-own contract.

There should be no obligation to purchase (double-check that you’re signing a lease option and not a lease purchase agreement!) so if you end up not liking the home (or finding issues you don’t want to deal with), you haven’t invested as much.

Important if: you’re unsure about homeownership or if you’re the type of person who tends to second guess major purchases. If this is you, be sure that your premium payment is on the low end, just in case you do end up changing your mind. 

Get a good monthly mortgage payment

Connolly says that a rent-to-own situation may be “Perfect for someone who may not have enough for a 20% down payment.” The minimum down payment to get a conventional loan is 3% of the purchase price, and the more you put down at closing, the lower your monthly payments will be.

At the low end of the premium payment scale, you’ll invest 2.5% in your rent-to-own property from the very beginning. Add the rent credits into that sum, and you should be in good shape to get a loan with a decent monthly payment rate. In fact, in some cases, you may end up paying less each month toward your mortgage than you did when you were renting.

Important if: you want to lower your monthly housing payments in the future and you prefer a method of saving that cannot be touched (remember that purchasing equity).

Move less

With a rent-to-own situation, you don’t have to wait to move into your dream house. You also don’t have to pack up and move again when your lease term is up. You can get into the place you really want and start making it your home.

Important if: you know this is the house you want to be in, long-term.  

Rent-to-own: The cons

You could lose money

It’s worth pointing out again — premium payment and rent credits are non-refundable. That means if you back out of the deal (which is your right), or if something goes wrong (see the next point), you’ve lost your initial investment for good.

Important if – you have hesitations about the longevity of this deal.  

Problems can occur

Yes, even with an airtight contract, there are still things that could go wrong. The house could be foreclosed on, or the landlord could get a lien on the property, for example.

When you have a rent-to-own agreement, those might be problems you inherit or they could be problems that nullify your deal.

Important if: you don’t have a buffer for unexpected expenses. 

You may have to take on repairs

You could be responsible for repairs while you’re renting. This might be fine if you’ve got room in your budget and want to invest in your future home anyway (maybe you’d rather be the one to pick out new kitchen hardware when a couple of drawer pulls break). But you’ll definitely want to check your contract to make sure the maintenance clause suits your needs and abilities.

Important if: you don’t have an already established maintenance budget. If this is you, be sure to put one in place before you sign a lease option agreement.

The purchase price is locked in

Yes, we mentioned this in the “pros” section too. That’s because that locked-in price could really go either way. If the market goes up, the fixed purchase price is to your advantage, but if the market goes down, you’re tied to a price that’s not sustainable.

A too-high purchase price means you likely won’t get your loan, since the property won’t meet the appraisal criteria of the lender.

Important if: you anticipate the housing market going down in your neighborhood. If you’re unsure, consult with a top real estate agent to determine trends.  

There is no financing guarantee

If you can’t qualify for a loan when the term is up, you might be out of luck. This means that your credit score and your debt-to-income ratio need to be in good shape by the time you intend to buy, or else you may lose your premium (especially if your rent-to-own contract does not have a renewal stipulation).

Important if: you lack job security or have a good deal of other (non-housing) debt.

Late payments are a big deal

Unless otherwise specified, the seller has the right to terminate the rent-to-own agreement based on late payments. That’s right — one late payment could derail the whole deal, and you could lose your investment.

Important if: you do not have a late fee clause built into your contract.  

Scams are abundant 

Unfortunately, there are those who would wish to take advantage of rent-to-own buyers. Beware of contract language that indicates any kind of obligation to purchase (remember, it should be an option, not an obligation).

Also, don’t provide any personal financial information upfront. If a seller refuses to let you have an inspection done, it’s time to walk away. Likewise, if they cannot provide a contract (fee-free) for you to take to your attorney, that should be a major red flag.

Important if: you don’t do your homework!  

So, is rent-to-own the best plan for you? By weighing these pros and cons, you can determine the best course of action when it comes to rent-to-own properties. And with the help of a top-performing real estate agent and a real estate attorney, you can make an educated decision that works in your favor.

Header Image Source: (Daria Nepriakhina / Unsplash)