What’s the Catch with Rent to Own Homes? 7 Reasons to Beware of These Deals

“Most people considering a rent-to-own purchase either don’t have a high enough income or good enough credit to buy a house right now,” says Hao Dang, who’s sold over 76% more single-family properties in the Seattle area than the average agent. Because of this, these deals are often highly individualized and depend heavily on negotiation between buyer and seller.

“It’s more of a one-on-one deal based on the personal circumstances of both parties,” says Rick Fuller, a top agent in the San Francisco Bay Area. Fuller explains that, in his market, rent-to-own agreements usually arise when a landlord is interested in selling their house sometime in the future, and they happen to meet a tenant who is interested in buying but still needs a little time to save up their down payment or raise their credit score.

In short, a rent-to-own deal makes the most sense when it’s going to be a win-win for both parties. Summer Rylander, a HomeLight contributor who sold her own South Carolina home through a rent-to-own agreement a few years ago, agrees.

“My house needed significant updates that I simply didn’t have the cash for, and my tenant was eager to buy in the neighborhood, but she needed time to improve her credit history and didn’t mind an imperfect property,” Rylander explains.

Overall, rent-to-own can be a great way to work toward buying a home, but only if both the renter and seller are on the same page about timing, expectations, and money.

The real risks of rent-to-own contracts for buyers

Rent-to-own (especially lease-purchase) can look appealing on paper, but don’t sign without a closer look. Here are a few key pain points to keep in mind:

1. You’ll probably pay more in rent every month than you would as a renter

Let’s face it, landlords won’t credit your rent out of kindness. The “extra” you pay each month is usually higher than normal rent, and not all of it goes toward your purchase.

For example, let’s say the standard rent for a property is $1,700 a month, but the landlord is offering a rent-to-own deal for $2,000 a month. Don’t expect to be credited for the whole $300 extra you’re paying each month.

In the fine print of this deal, it could turn out that you’ll be credited just $200 of that $300 each month. So, in reality, you’re paying this landlord $100 simply to “save” money for you.

But, it may be helpful to shift perspective and think of this as a convenience fee, because few homeowners will choose to delay the sale of their home by a year or more when they could otherwise probably close in 30 days once their house is under contract.

2. You’re paying less toward the price of the house than you’d think

Putting several hundred dollars a month toward the purchase of a house before you can actually afford a mortgage sounds like a smart financial move on the surface. But when you run the numbers, you’ll see that the sum total of the credit doesn’t actually amount to much, even in the long run.

“It’s just like leasing a car. If you actually pay off and purchase a leased car, you’ve paid a lot more than if you’d simply purchased the car outright,” explains Dang.

Let’s say you’re paying $2,000 a month in a rent-to-own deal on a $400,000 home, and the landlord agrees to put $200 a month (or 10% of your rent) toward the price of the house.

That’s only $2,400 in one year.

In five years (the maximum of most lease-purchase agreements), that’s a total of only $12,000 that’ll be credited against the agreed-on purchase price.

And you could pay that much just to get into the deal in the first place, because…

3. Most rent-to-own contracts require a nonrefundable upfront fee

Sure, renters expect to pay fees to lease an apartment or house for things like security deposits and application fees, sometimes as much as two months’ rent. But if you’re opting for a rent-to-own deal, expect to feel a little sticker shock.

Most lease-purchase agreements require an upfront, nonrefundable, one-time fee that’s calculated by the home valuation. While the amount is negotiable, it’s typically between 1% to 7% of the agreed-upon purchase price.

Do the math, and you’ll see that you’re paying anywhere from $4,000 to $28,000 (on a $400,000 house) just to get into the rent-to-own deal.

That may be around the same as or more than what you’ll pay again in closing costs when you eventually get a mortgage on the house.

For example, if you get a 30-year, fixed-rate mortgage for $380,000 (after making a $20,000 or 5% down payment on that $400,000 home), you’ll pay around $18,000 in closing costs in Phoenix, AZ, according to HomeLight’s Closing Cost Calculator.

Alternatively, you could save the upfront fees you’ll pay on a rent-to-own deal, put that money in a savings account or, better yet, a mutual fund, and let it earn interest so you can afford to purchase a home sooner than you could in a rent-to-own deal.

4. You may lock in at a bad valuation

Like the price of gas, home values are constantly fluctuating. Sure, it’s true that, historically, home values increase over time because it’s an appreciating asset. However, in the short term, list prices rise and fall by thousands of dollars within the span of weeks or months.

That can be a problem with the rent-to-own because most lease-purchase contracts state the agreed-upon sales price of the home in the contract. In other words, you’re locking in the price of the home one to five years before you buy it.

“It is possible for a rent-to-own contract to just set a purchase price range, but typically, you’re negotiating and locking in the price of the house long before you actually buy it,” explains Dang.

“If the property value has decreased when it comes time to purchase the house, the tenant is still locked in to pay the higher price.”

If the home’s value does drop below your agreed purchase price, it can seriously hurt your appraisal and wipe out any credits you’ve built up. Banks won’t finance more than the home is worth, so the deal can fall apart fast unless you can cover the gap.

Alternatively, the home’s value could rise while you’re renting, which is great for you, but not so much for the seller. When prices are climbing consistently, landlords may think, “Why lock it in?” A steadier market, though, can make them more open to a rent-to-own deal.

5.  You’re on the hook for repairs to the house

In most rent-to-own deals, landlords don’t want to keep paying for repairs on a home they’re planning to sell. That’s why standard rent-to-own agreements shift maintenance and repair costs to the tenant instead. So instead of the landlord handling fixes like a typical rental, you’re the one covering the bills when something breaks.

“I definitely stipulated that my tenant was responsible for maintenance and repairs as soon as she moved in,” says Rylander. “I wanted her to feel as though the home were hers from day one.”

Rent-to-own contracts can vary by state, and sometimes sellers may cover repairs, but don’t bank on it. On paper, it might feel fair since you’re planning to own the home anyway. The problem is that the deal might never actually close. And if the water heater quits or the furnace gives out, you could be footing the bill for a house that’s still not technically yours.

“It’s not an ideal scenario,” admits Rylander. “Though my tenant and I both readily agreed to these terms, the advice I would give a rent-to-own buyer today is to be wary if you’re looking at a house that needs work. Repairs or improvements are a lot to take on for a property that isn’t technically yours, and you don’t want to feel resentful before you’ve even made it to the closing table.”

Furthermore, if you default on the lease, you may not be able to buy the house, so you’ll lose the rental credit money and every penny spent making repairs and home improvements.

And it’s surprisingly easy to default on a rent-to-own agreement.

6. Late or missed payments for any reason could kill the deal

In a normal rental, being late usually just means a fee and maybe a stern reminder. No big deal, right?

But in rent-to-own, things get more serious. Even if your landlord is understanding and waives the fee, a single late payment could still put your entire agreement at risk. Always check the fine print, as one slip-up might quietly erase your path to buying the home.

And it’s not just late payments that are an issue. There’s a long list of scenarios that can trigger a default in a rent-to-own contract, such as violating a “no pets” clause or failure to make required repairs promptly.

Even if you’re a perfect tenant who’s followed the contract to the letter, there’s still a chance the rent-to-own agreement could be voided. Let’s say you can’t afford to buy the house, or you fail to secure a mortgage. When the lease is up, don’t expect a refund. Failure to make good on the purchase nullifies the lease, and that rental percentage credit you earned vanishes.

7. The rent-to-own setup is vulnerable to scams and shady landlords

In a rent-to-own deal, most of the risk sits with the tenant. You’re paying extra rent and covering repairs, all in hopes it eventually turns into ownership. Meanwhile, the landlord keeps the title the whole time, so if things fall apart, they keep the house and what you’ve paid.

That said, rent-to-own isn’t exactly most landlords’ master plan for early retirement.

“Honestly, I was stressed every month waiting on the rent check,” says Rylander. “I still had a mortgage payment to make, whether my tenant paid on time or not. People like to make a villain out of landlords, but sometimes we’re genuinely just one person with one property, trying to make ends meet just like you. Not every rental scenario is profit-driven.”

Nevertheless, the financial jeopardy you put yourself in is serious enough that the Federal Trade Commission issued a report that rent-to-own agreements can be shady deals and downright scams.

Should you fall victim to one of these scams and an unscrupulous landlord, then at best, you’ll have an unpaid tax bill. At worst, you’ll have spent years thinking you’re paying down the price of a home that you’ll never be able to purchase.

Top Battle Creek, Michigan-based agent Cassie Scramlin warns that there is no real way to know for sure that your landlord is making payments on the home. And even if the foreclosure process begins, you’re still on the hook for your own rental payments as agreed.

“It’s important to understand that [in Michigan] you’re bound legally by that lease-purchase or rent-to-own agreement to make your payments, regardless of whether or not the seller is making theirs,” says Scramlin.

She advises would-be buyers to work with an experienced agent and exercise due diligence to make sure they have the best possible chance of successfully purchasing the home. Scramlin encourages buyers to ask sellers for a title policy search to understand right away if there are any liens, tax issues, or other problems that could delay or prevent a sale.

Other disadvantages of rent-to-own homes

Now that you’ve seen the real risks of rent-to-own, higher rent, repair bills, and shady landlords, it’s time to learn about the other pitfalls. Spoiler: some aren’t always obvious until you’re knee-deep in the lease. Beware of these disadvantages that can turn your “dream path to ownership” into a bit of a minefield:

Reluctant sellers

As mentioned earlier, it can be tough to find a seller willing to enter a rent-to-own agreement. When the real estate market is in favor of sellers and available homes are limited, there’s simply little motivation for a homeowner to delay the sale of their home to let you rent it first.

Limited property choices

Even if you find a willing seller, there’s a limit to the types of homes that might be offered as rent-to-own. If you’re looking for a luxury property, for example, it’s unlikely to happen. The same goes for uniquely constructed homes. If you have your heart set on one that has sustainability at the forefront of its design, you’re probably not going to find a seller offering a lease-purchase.

Renter-buyer’s remorse

Admittedly, this could happen even if you purchase a home straightaway, but what happens if you move into a house on a rent-to-own agreement and realize you don’t actually want to own the place? You’re probably not going to get back the money that has been set aside toward your future down payment if you pull out of the deal.

And, again, this is where it’s key to read the fine print on any sales or leasing contract. The seller may be able to pursue legal action for your failure to uphold your end of the agreement.

Financing challenges

Even if you spoke with a lender before setting out to find a rent-to-own property, there’s no guarantee you’ll be approved for a mortgage by the time your lease is up, and it’s time to buy. While you can reduce complications by working with a lender early, improving your credit, and keeping up with payments, surprises can still happen.

If you have a lease term of one, two, or even three years before you’ll be obligated to buy the home, a lot can change in terms of income, market value of the property, and mortgage interest rates. This is why it’s important to proceed with caution.

Protection from rent-to-own risks: Do your due diligence

Rent-to-own agreements aren’t automatically a bad idea. You just need to do your homework before signing on the dotted line. Here’s how you can perform due diligence:

• Talk to the seller: Fuller recommends having an honest conversation with the seller to see if rent-to-own is even on the table. Since most homeowners prefer a traditional sale, if they’re open to rent-to-own, it’s perfectly fair to ask what’s motivating their decision.
• Check the seller’s mortgage status: Scramlin advises buyers to confirm whether the homeowner is current on their mortgage payments. While a seller could technically lie, most states require posting a notice of default in the public record after a certain period, making it possible to spot a property heading toward foreclosure.
• Run a title check: Scramlin also suggests running a title search to uncover any liens, unpaid taxes, repair bills, family disputes, or other claims that could affect ownership.
• Don’t skip the home inspection: Even if the home is being sold as-is or you’ll be responsible for repairs during the rental period, a thorough inspection is essential. This is your chance to see what you’re really getting into before committing.

Don’t forget, the drawbacks we’ve discussed apply mostly to lease-purchase agreements, but a lease-option contract isn’t far behind. The latter could be a good deal for you if you negotiate well and it’s written with your interests in mind, but it’s not without similar pitfalls.

Get Expert Help from a Local Agent

Don’t navigate a rent-to-own deal alone. Partner with an experienced agent who knows the ins and outs of the market. They can help spot risks, negotiate terms, and make sure you’re set up for a smooth path to homeownership.

Find a Top Agent

So, when does a rent-to-own agreement actually make sense?

Rent-to-own can make sense if your financial situation is expected to improve soon, like a credit boost, higher income, or a clear plan to save for a down payment. It can give you breathing room when you’ve found a home you love but aren’t quite mortgage-ready, though longer timelines also mean more uncertainty and risk.

If you’re offered a lease-option, don’t write it off too quickly. It simply gives you the right to buy later, usually for a fee. Before signing anything, have a real estate attorney or experienced local agent review the contract to make sure it actually works in your favor.

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