Trying to buy a house while you’re already renting a place can feel like a Sisyphean task. You need to save up money for a down payment and closing costs (which are calculated as a portion of your purchase price), but home prices just keep going up, even with the 2023 market slowdown — so when you finally reach your goal, you realize that the goalposts have moved, and the hill is even taller than you thought. And while you’re saving up for those home-purchase expenses, you’re still spending a significant chunk of your money on monthly rent.
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.
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.
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.
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.
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.
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
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.
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.
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 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 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 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.
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.
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.
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)
- "Selling Guide: What is the minimum credit score requirement?," Fannie Mae (June 2022)
- "Closing Disclosure Explainer," Consumer Financial Protection Bureau
- "Loan Estimate Explainer," Consumer Financial Protection Bureau
- "Selling Guide: What is the maximum DTI ratio allowed?," Fannie Mae (June 2022)
- "Lease Purchase Property Guide: Purchase Price Caps," Home Partners of America, Pathlight (2022)