What’s the Catch with Rent to Own Homes? 5 Reasons to Beware of These Deals

Table of Contents:

What is Rent-to-Own?

A rent-to-own agreement refers to an arrangement where the tenant agrees to purchase the property before the lease expires. Usually, these agreements are made up of two separate parts. The first one is a standard lease agreement; this is what allows the tenant to rent and live in the property. The second one is an option to buy deal. This gives the tenant the ability to purchase the property before their lease is up.

How Does Rent-to-Own Work?

A rent-to-own agreement has two main parts. The first part includes the standard lease agreement signed between the tenant and the landlord. The second part consists of an option to buy the property.

The first step in establishing a rent-to-own agreement is paying the Nonrefundable Upfront Fees. To be given the option to buy the property, an option fee needs to be paid ahead of time. The buyer makes this one-time payment to the seller to unlock the option. The option fee is entirely negotiable as there is no standard price. The cost usually ranges between 1 and 5 percent of the property’s purchase value.

There are two popular types of rent-to-own contracts, and while at first glance they might appear similar the two are significantly different.

1. Lease-Option

The lease-option contract gives you the option to buy the property, but there is no obligation to purchase the home when the lease ends. This means you could potentially change your mind after living in a property for a time and decide not to proceed with purchasing the home.

2. Lease-Purchase

A lease-purchase contract is similar as it begins as a rental, but usually, there is an obligation to buy the property by the end of the lease. A lease-purchase agreement is stricter than a lease-option agreement, and there is very little flexibility on terms.

To decide which of these two types of contracts would work best for you, you’ll need to determine whether you are truly set on buying the property in question. If the answer is yes, you may find going with either of the two options, but if you still have doubts and the tenancy was only meant to work as an assurance, you’d be better off with a lease-option contract.

A smarter way to buy your home.

Buy your home and get up to 1% cashback.

Book a Call

Apart from deciding on the type of rent-to-own agreement you’ll have; you’ll also need to assess the property’s value. Usually, the amount you’re expected to pay to purchase the house is also noted on the agreement. This price is typically based on the market value when you sign the agreement.

It’s essential to ensure that part of the rent goes towards the principal balance. The principal is the purchase price you’ve agreed on with the property owner.

How to Rent-to-Own Homes?

If you are looking for a rent-to-own home agreement, you’ll need to take the time and figure out which homes in your area have landlords willing to participate in a rent-to-own deal. Most frequently, houses that have been on the market for some time will be more likely to have owners willing to consider a rent-to-own agreement as they’ll want to do anything to sell the property.

How Is Rent-to-Own Different Than Buying a House?

When buying a home, you immediately pay the total amount for the property to the property owner. The deed is then transferred to your name, and you take full ownership. However, in a rent-to-own agreement, you may live in a home, but it isn’t yours until it is fully paid off. Therefore, in a rent-to-own situation, you’ll still have a landlord while living in the home until it has been fully purchased.

What’s the Catch with Lease to Own?

Unlike most leases where the maintenance of the property falls in the hands of the property owner, in lease-to-own agreements, it’s up to the tenant to fix issues that arise in the property. Unfortunately, this isn’t always the case. There often is a clause in the agreement stating who is responsible for the maintenance work. This is the biggest catch of a lease-to-own contract. If you choose not to purchase the house at the end of the lease, all the money paid for the maintenance of the property is essentially wasted. In some cases, as the tenant, you may be able to negotiate this clause and even get rid of it. However, the tenant is usually responsible for property maintenance if they’re considering purchasing the property.

Can a Landlord Break a Rent-to-Own Contract?

As soon as the option has been paid in a rent-to-own contract, it becomes legally binding for the landlord. In some cases, the tenant can decide whether they still want to purchase the home at the end of the lease. There is never a case where the landlord has an option not to sell after the lease ends. From the moment the rent-to-own contract is signed, it’s considered legally binding.

How Does Rent-to-Own Work for the Seller?

A rent-to-own agreement works similarly for both parties. Once the deal has been signed, the seller can enjoy a relatively reliable tenancy without worrying about the maintenance of the property. Most importantly, if they were initially looking to sell the property and had previously been unable to find a potential buyer, they can be relatively sure that their property will be sold by the end of the tenancy with a rent-to-own agreement.

One of the negative aspects of the rent-to-own agreement for the seller comes from being unable to retract the deal if they so wish. While the buyer is given the option not to purchase the home in most such agreements, the seller isn’t given the option to rethink the deal.

The most important benefits of a rent-to-own agreement for the seller are:

• Assurance of sale
• Reliable tenants
• Not having to worry about maintenance costs

What Are the Advantages of Rent-to-Own Agreements?

When considering a rent-to-own agreement, you should know some of its most common advantages. This type of contract may have some benefits you had not previously thought of. Therefore, we’ve put together a helpful list of all the pros of having a rent-to-own agreement.

1. Your rent can be used for part of the purchase price. This helps you save money indirectly.

2. You maintain the right to walk out of the sale with lease-option agreements if the home is no longer what you were looking for.

3. A rent-to-own agreement can help you prepare financially to purchase the home.

4. You can truly see if the house is a good fit for you while residing in it.

5. You may be able to lock in a lower purchase price than the average price at the time of the actual purchase.

6. You can learn your way around the neighborhood and see if it fits your lifestyle needs.

7. Reduction of moving costs.

A smarter way to buy your home.

Buy your home and get up to 1% cashback.

Book a Call

What Should Be Considered When Renting-to-Own?

If you are considering a renting-to-own agreement, there will be many different things you’ll need to consider before signing the contract. In addition, both the buyer and the seller will need to make unique decisions to ensure that they’re both willing to proceed with the agreement.

• For the seller

As a property seller, there are many important things to consider. The most important one of these is the property’s price. Usually, the agreed-upon price will be based on the market value when signing the rent-to-own agreement. Once the lease ends, the market may be better in a year or two, and your property could sell for me. However, as it is already contractually bound by the previous agreement, this could result in you losing money in the transaction.

Another essential thing to consider, especially if your initial plan was to sell the house, is whether the agreement you have in place is suitable for you. Having a tenant instead of a buyer, especially when the tenant isn’t contractually obligated to buy the property, is much different from having someone ready to purchase the house. You should also note that as the agreement is legally binding, you won’t be able to walk out of the contract unless the prospective buyer decides they’re no longer interested.

• For the buyer

Much like the seller has many things to consider, so does the buyer. Perhaps the most important thing to remember as a buyer in these situations is the type of contract you are signing. If it’s a lease option, you’ll still get to have your time to decide what the best option for you is and whether you still wish to purchase the house. On the other hand, lease-purchase agreements take away this opportunity. They could lead to you being contractually bound to buy a home you are not as interested in buying anymore.

Apart from the type of contract you are signing, you’ll also need to consider whether or not the maintenance costs are something you’ll be able to bear. For example, depending on the property’s condition, you could pay hundreds of dollars for a property you’ve decided not to purchase. On the other hand, with a standard rental contract, you wouldn’t have to worry about paying for the maintenance of the property. This ease of mind is a plus for many tenants.

Summary

Rent-to-own agreements are often good options for both buyers and sellers. Depending on the type of rent-to-own agreement, the buyer can often save money on a home purchase and can change their mind if they decide they no longer want the property later on.

For the seller, the benefits of rent-to-own agreements are twofold. First, sellers don’t need to worry about property maintenance issues while still collecting rent. Second, they can rest assured that their property will sell. These benefits are why more and more sellers are choosing rent-to-own options.