{"id":16316,"date":"2021-08-23T12:38:47","date_gmt":"2021-08-23T18:38:47","guid":{"rendered":"https:\/\/www.lexingtonlaw.com\/blog\/?p=16316"},"modified":"2025-08-26T10:08:08","modified_gmt":"2025-08-26T16:08:08","slug":"rent-to-own-how-does-it-work","status":"publish","type":"post","link":"https:\/\/www.lexingtonlaw.com\/blog\/finance\/rent-to-own-how-does-it-work.html","title":{"rendered":"Rent-to-own homes: how does it work?"},"content":{"rendered":"\n
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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice.<\/em> See Lexington Law\u2019s editorial disclosure for more information.<\/em><\/a><\/p>\n\n\n\n

If you\u2019ve heard the phrase \u201crent-to-own,\u201d you might be wondering to yourself, \u201cHow does rent to own work?\u201d Rent-to-own homes start very similarly to a typical rent agreement. The main difference is that the contract allows the renter to buy the house at a certain point in the future. This may sound like an ideal solution, so why don\u2019t more people do it? Well, it\u2014of course\u2014comes with some downsides. Keep reading to find out what rent to own is, how it works and if it\u2019s right for you. <\/p>\n\n\n\n

What does rent-to-own mean?<\/h2>\n\n\n\n

Rent-to-own means that you pay rent on an asset, such as a piece of property or a vehicle, with the opportunity to buy the asset out one day. A portion of the payments you make while renting can contribute to the final purchase price. <\/p>\n\n\n\n

Most people today are more familiar with a rent-to-own model when it comes to cars. When you lease a vehicle, you can typically opt to buy the car at the end of the agreement for the remaining balance. <\/p>\n\n\n\n

How does the rent-to-own process work?<\/h2>\n\n\n\n

Rent-to-own is relatively straightforward, but it\u2019s crucial to understand the details before deciding if it\u2019s right for you. First, it\u2019s important to know that a contract for a rent-to-own home typically sets the home\u2019s price at a higher value than the current market value. This is because the assumption is that the market will go up over the life of the contract. <\/p>\n\n\n\n

Types of agreements<\/h3>\n\n\n\n

There are two types of rent-to-own agreements: a lease-option agreement and a lease-purchase agreement. In the lease-option version, you have the option to buy the house at a specific date for a particular amount. If you don\u2019t want to buy when the time comes, you simply pass up the opportunity. <\/p>\n\n\n\n

For example, let\u2019s say you agreed on a rent-to-own home contract where you would buy the house in 10 years for $200,000. Unfortunately, the contract ends during a recession and the housing market has seen a dip. The current value of the home is only $150,000. In a lease-option agreement, you might opt to walk away from the home purchase as it\u2019s not worth $200,000. <\/p>\n\n\n\n

On the other hand, a lease-purchase agreement is definitive. You\u2019re expected to buy the home when a specific date comes. So, in the above example, a lease-purchase deal means you\u2019d be expected to buy that home at $200,000 even though the current market value is $150,000. <\/p>\n\n\n\n

It\u2019s essential to understand which type of agreement you have so you can prepare yourself. Generally speaking, a lease-purchase agreement is less ideal because you have fewer options. <\/p>\n\n\n\n

The option fee<\/h3>\n\n\n\n

A rent-to-own contract comes with an option fee, also known as option money or option consideration. To give you the option to buy the home one day, the lender collects a fee of between 1 and 5 percent of the home\u2019s price. This fee is negotiable, but it\u2019s paid up front and is nonrefundable. If you decide to buy the house in the future, this option fee is sometimes applied to the home\u2019s price. <\/p>\n\n\n\n

Make sure to understand your option fee before signing a contract. You\u2019ll want to negotiate the amount, ask for it to apply to the future home price and get everything in writing.<\/p>\n\n\n\n

The purchase price and the rental term<\/h3>\n\n\n\n

As mentioned, the home\u2019s purchase price is typically set above the home\u2019s current market value. The renter and the landlord decide on a purchase price together. You should only agree to a price that makes sense. It\u2019s essential to research how much homes in the area are currently worth, previous home sale trends and expected housing market trends. <\/p>\n\n\n\n

In most cases, the purchase price is set when the two parties sign a contract. It\u2019s possible to set up a rent-to-own home contract without defining a purchase price. This comes with both positives and negatives. <\/p>\n\n\n\n

On the one hand, it\u2019s harder to plan for your purchase price because you don\u2019t know what it\u2019ll be. If the housing market spikes during your rental contract term, you might not be able to afford the suggested price. On the other hand, by not agreeing to a price, you can probably get the house at a fair market price.<\/p>\n\n\n\n

Additionally, the renter and landlord agree to the rental term length. Typically, landlords only like to sign rent-to-own contracts for between three and five years. A renter should agree to a term length that will allow them to get their finances in order, be approved for a mortgage and save to buy. <\/p>\n\n\n\n

The rent premium<\/h3>\n\n\n\n

In some rent-to-own contracts, a portion of the rent payment can apply to the future purchase price. For example, let\u2019s say you pay $1,000 in rent monthly and 15 percent is applied to your future home sale. Over a contract of three years, you\u2019ll get a credit of $5,400 toward your price. <\/p>\n\n\n\n

Note that if you get this type of contract, your rent will likely be placed slightly higher than market rates. Once again, this is to make things fair for the landlord so they aren\u2019t losing out on their profits. <\/p>\n\n\n\n

You should get all these details in writing to ensure you have proof when it comes time for the home sale. <\/p>\n\n\n\n

Home maintenance obligations<\/h3>\n\n\n\n

A rent-to-own home makes the maintenance obligations less clear. In a typical renter-landlord relationship, the landlord is obligated to deal with home maintenance issues. However, in a rent-to-own situation:<\/p>\n\n\n\n