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The real estate market can be intimidating for anyone, but especially those who may be in the market for their first home or have less-than-excellent credit. But what if there was another option? Rent-to-own homes can be a great way for those who aren’t quite ready to take on homeownership to start taking steps in that direction.
Learn more about what rent-to-own is and how it compares to buying a house the usual way.
What does rent-to-own mean?
The process of rent-to-own is very much what the name sounds like. You start by renting the home but enter into a contract as part of your rental agreement that you intend to purchase the home after an agreed-upon amount of time.
As long as you do buy the home, a specific portion of your rental payments that was determined up front is applied to the price of the home.
A rent-to-own agreement also locks in the price of the home at the time of the contract, so you don’t have to worry about appreciating values putting the house out of your financial reach after a few years.
When you choose rent-to-own, you have to decide if you’re going to go with a lease-option or a lease-purchase agreement. A lease-option means you have the option to buy the home at the end of the rental period, but you aren’t legally bound by the contract to do so.
A lease-purchase is a legally binding agreement that you will buy the house at the end of the rental period, and you can face fees and other repercussions if you don’t follow through.
How is rent-to-own different from buying?
If all goes well, the end result of rent-to-own is the same as when buying traditionally, but the process of how you get there is a little more complicated.
When you buy a house traditionally, you work with a real estate agent, look at homes that fit your purchase budget and then make an offer on the one you like. As long as the offer is accepted and nothing shows up on the inspection or appraisal, you close on the house and it’s yours.
With rent-to-own, you’ll still likely work with a real estate agent and look at homes. However, when you find one you like, you’ll enter into either a lease-option or lease-purchase agreement and start renting the house. After the rental period is over, you’ll then have to buy the house with a mortgage and the traditional closing procedures.
Rent-to-own can be more expensive because there are usually fees associated with this option. You’ll have to pay those as well as the regular closing costs and fees when it’s time to buy the house.
In most cases, you’ll also be responsible for most of the maintenance on the house while you’re renting, which can be expensive if you’re used to being able to just call the landlord.
The risks of rent-to-own
There are two main risks involved with rent-to-own situations. The first is that property values in the area decrease over the rental period, which could leave you paying more than the house is worth.
The second is that you lose the house—and usually a decent chunk of your money investment with it. Here are a few scenarios that could happen:
The advantages of rent-to-own
Doing a rent-to-own option instead of a traditional purchase has several advantages, especially if your credit isn’t great. Rent-to-own lets you go ahead and pick out a house you want to buy and lock in a price while still giving you time to build your credit or save up money for closing costs.
It can also help you build equity instantly when you complete the purchase because of the portion of rent that’s allocated to the purchase.
Should you rent-to-own or buy?
If you’re considering rent-to-own, you’re probably wondering if it’s a better option than buying traditionally. And the answer is, it depends. Every situation is unique, but rent-to-own can be a better option is some cases.
Rent-to-own can let you get a better feel for what homeownership is like because you’ll be taking on most of the maintenance of the home. If you have a lease-option, you can decide that you don’t like the responsibility of having to pay to fix or maintain things and that renting is better for you.
It can also be a better option for those who know they want to buy their own home but who don’t have the credit or money in the bank to do that right now.
Rent-to-own lets you start building equity right away instead of all of the money going to your landlord’s mortgage, and it gives you a few years to work on saving money, building a strong credit history and paying down debt.
No matter your reasons for wanting to do a rent-to-own option, it’s important not to try to go through the process alone. A qualified real estate agent who has experience working with rent-to-own situations can help you find a suitable property and help ensure you understand what you’re signing up for.
They can also suggest and set up things like a home inspection if you want that done before entering into the contract.
For more information on rent-to-own, examples of contracts, red flags to look out for and ways to shop for the best deal, download the Complete Rent-to-Own Guide for Prospective Homebuyers.
Alternatives to rent-to-own homes
If you decide rent-to-own isn’t for you and you can’t get a traditional mortgage, there are still some other options. You can wait and spend a year or two working on your credit.
Paying down debt, making sure all payments are made on time and building up your savings can put you in a much better position to buy a house and help you qualify for a better interest rate.
You can also look at options such as an FHA or USDA loan. These often have lower credit score requirements and may require less money down than a traditional conventional mortgage. You may also be able to look into getting a cosigner for your mortgage if you have a friend or family member who’s willing to take on the risk.
Bottom line: rent-to-own can be a great avenue to homeownership as long as you work with professionals, understand what a rent-to-own contract entails and understand what to look for in a suitable property.
Reviewed by Brad Blanchard, Supervising Attorney at Lexington Law Firm. Written by Lexington Law.
Brad is an attorney at Lexington Law firm whose practice is primarily focused on corporate compliance. His focus is primarily in the areas of marketing and advertising of financial services. He regularly deals with issues related to FTC Regulation 5, UDAAP, FCRA, FDCPA, CROA, TCPA, and TSR. He also has experience in LLC formation, contract review and negotiation, and trial and litigation experience in the areas of consumer protection and family law. Prior to joining Lexington Brad worked on Department of Labor administrative law cases and federal class action lawsuits. He also externed for a Utah State Court trial judge where he worked on both civil and criminal cases. Brad is licensed to practice law in Utah and Ohio. He is located in the North Salt Lake office.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Lexington Law is not an RTO company. Any content provided on this website regarding the topic of RTO is nothing more than a resource Lexington Law believes might be helpful to readers of its website. Lexington did not write this content. It was provided by a third party. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Lexington did not write this content. It was provided by a third party.