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What Is a Rent-to-Own Home? (How It Works, and Pros and Cons)

Homebuyers who have found their dream home but can’t afford a mortgage sometimes suggest or are offered the option of renting to own a property. While this may sound a good offer for the seller and prospective buyer, it’s still not free of pitfalls.

So what exactly happens when a tenant rents a property for them to own in the future? What are the negative sides of the deal to both the seller and buyer? Are there any pros on both sides? What can the two parties do to satisfy the other? Find out the answers to the questions below.

What Is a Rent to Own Home and How Does It Work?

A rent-to-own home is a type of house bought through a rent-to-own contract. This contract sets a condition where the buyer rents a property for a specific period of time. After the contract is fulfilled, only then a homebuyer gets the chance to take ownership of the house.

The renting period varies from months to years depending on the specifics of the contract. There are also two types of rent-to-own contracts: the Lease Option Agreement or the Lease Purchase Agreement.

Through the Lease Option Agreement, the homebuyer has the option of purchasing the property after the agreed renting period is completed. The Lease Purchase Agreement, however, makes the renter obligated to buy the property after the contract is fulfilled.

In the rent-to-own contract, it will be stated when and how will the final purchase price be decided. Paying rent every month is part of the contract here.

Pros of Rent-to-Own for Buyers

1.   You build a downpayment over time

The agreement will state that it will take a portion of your rent. That portion will be kept as a downpayment or for building equity that will be used on your final purchase.

2.   Avoid buyer competition

If the property you’ve found is your dream home, you have a 100% own securing it for yourself. The home seller has no authority to go back on the deal and sell it to someone else. This case still applies after your rental period.

3.   No need to qualify for the mortgage right away

If you have some debt you need to clear at the moment, there’s no problem. Rent-to-own agreements don’t require mortgages or large sums of downpayment. However, your lease-to-own deal will fail if you’re currently in a financial mess.

Pros of Rent-to-Own for Sellers

1.   Wider buyer pool

It will be faster to sell the home as you’ll not only attract buyers but renters as well.

2.   Invested renter

A buyer who really loves the property is sure going to take care of it during the rent period. That means no costs for maintenance and repairs.

3.   Earn income

This will work well if you don’t want to sell the property immediately yet want to earn some as you buy another one. Not only do you gain profit monthly, but you will also gain more when you finally sell the house.

Risks of Rent-to-Own for Buyers

1.   Non-refundable option money

If you decide not to buy the rent-to-own house through the Lease Option Agreement, the accumulated down payment/equity won’t be returned to you. You need to make sure you won’t have any need to change residences during the duration of the contract.

2.   Rent will be more expensive

A part of your monthly rent will be taken for the downpayment of the final purchase. So, your rent will be much higher than homes that aren’t for sale.

3.   You might pay for repairs and maintenance

It’s not rare for potential buyers/tenants to cover costs for repair and maintenance. Think about an emergency that puts a hole in your wallet and the reason for it is because of a house you don’t even own yet.

Risks of Rent-to-Own for Sellers

1.   Slow money

Compared to selling the home immediately, you can’t get a large sum which you might need in buying your next property.

2.   Uncertainty

Your buyer might decide not to buy the home. But, at least you get to keep the non-refundable down payment

3.   Missing appreciation and falling house prices

In the rent-to-own agreement, you might set the selling price too low than the prices in the future. Or if housing prices fall and the buyer cancels, you might regret not selling the house before.

The bottom line is, a rent-to-own agreement is a good deal provided that the buyer pays on time in full while buying the house in the end. On the seller’s side, they also need to price the house and rent right. A price that won’t make them regret not selling due to market price crash or rises.

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