You may be asking, “What should I know about rent-to-own homes?” To find out, we talked to experts like Rick Fuller<\/a>, a real estate agent in the San Francisco Bay Area, Eric Dunn<\/a>, director of litigation at the National Housing Law Project, and Robert A. Miller<\/a>, a real estate attorney based in Prescott, Arizona.<\/p>\n This primer will tell you what you should know about rent-to-own homes<\/a>: the good, the bad, and the ugly.<\/p>\n\n\n\n\n\n When considering a rent-to-own home, working with a real estate agent experienced in these types of deals can help you navigate the process and find a great deal.<\/p>\n \n With a rent-to-own agreement<\/a>, you make an agreement with the seller that they will either sell you their house or offer you the option to buy after a certain period of time (usually within one to three years<\/a>).<\/p>\n Once the agreement term concludes, you pay a down payment, secure a mortgage, and transition from tenant to owner<\/a>. The rent payments you made may reduce your purchase price, contributing to your down payment<\/a>, and lowering your total mortgage loan.<\/p>\n Fuller, who has 21 years of experience, shares a rent-to-own buyer success story. His team represented a seller who rented a Brentwood, California, house to a tenant interested in eventually buying the property. Over five years, the tenant paid a couple extra hundred dollars a month over her monthly rent, eventually taking the option to buy and contributing more than $10,000 to her down payment.<\/p>\n \u201cThe nice thing was \u2026 this particular buyer bought the property with this option, and they bought it with a price tag of five years ago,\u201d Fuller says. \u201cThis really works in an escalating, rising market for a buyer.\u201d<\/p>\n To get the agreement that works best for you, it\u2019s important you work closely with an experienced real estate agent. While your exact arrangement will be unique to your situation and the seller\u2019s, it may fall into one of two types: lease option or lease to own home program<\/a>.<\/p>\n This path is similar to a standard rental lease. The big difference is, you pay an option fee to purchase the home at a later date. This option fee locks the sales price, but you\u2019ll still owe a down payment at the time of purchase.<\/p>\n If you opt for a lease-purchase agreement, part of your rent will typically go toward your eventual down payment (some lease options have this feature as well). This means you are likely trading a higher monthly rent for a lower down payment at the end of the term. Once your contract ends, you are obligated to buy the property.<\/p>\n If you opt for the lease option route, the seller may ask you to pay what\u2019s called an option fee (also known as premium payment or option consideration). It\u2019s typically between 2.5% and 7% of the agreed-upon purchase price, and it locks your sales purchase price. You can negotiate whether the fee counts toward your down payment.<\/p>\n The money usually isn\u2019t refundable, so if you default on the contract\u2019s terms, or choose not to purchase the house, the homeowner can keep it.<\/p>\n When you sign a contract with the current homeowner, you\u2019ll agree to the future purchase price. Here\u2019s where working with an experienced real estate team comes in handy. \u201cFor a tenant, knowing the trajectory of the real estate market is important,\u201d Fuller says. \u201cIf you secure an option and identify a purchase price, and the market declines, then nobody is going to exercise that option to buy a home above what market value is or even above what the property would appraise for.\u201d<\/p>\n \u201cWorking with a real estate agent and understanding the local dynamics of that market are imperative for a tenant,\u201d he adds.<\/p>\n Just as you would with any rental, you should expect to pay monthly rent payments while you rent to own. Make sure you\u2019re paying your rent on time, every single month. Late payments could jeopardize your contract.<\/p>\n In some rent-to-own agreements, part of your rent will go toward your eventual down payment.<\/p>\n If you\u2019ve been a renter, you\u2019re used to calling your landlord when something breaks. That might not be an option with a rent-to-own home. Depending on how your contract is written, it may be your responsibility to replace the fridge when it stops running or pay the plumber to fix a leak.<\/p>\n These costs can add up<\/a> \u2014 especially if you decide not to purchase the home.<\/p>\n The term of your lease, or the time limit, is how long you\u2019ll rent the house before you opt to buy it (or have to, depending on your contract).<\/p>\n Your path here was different, but you\u2019ll still go through that same rite of homeownership: getting a mortgage and closing. You\u2019ve already got the keys in your pocket and your shoes in the closet, but when you close you\u2019ll officially be the homeowner. Make sure you\u2019re prepared to pay the typical closing costs<\/a>.<\/p>\n Deciding to purchase a home is a big life decision; so is deciding to rent-to-own. Here are some pros and cons to weigh.<\/p>\n For certain aspiring buyers, a rent-to-own arrangement can be a good fit. \u201cIf someone finds a property that they\u2019re renting that they would really like to purchase, this can be a good option,\u201d says Fuller.<\/p>\n One reason is because they can lock in a price.<\/p>\n \u201cYou can actually secure a price and then buy the home a year, or two years, or even three years later, and the equity that is accumulated over those several years is something the buyer could benefit without actually having ownership of the property,\u201d he says.<\/p>\n It can also be structured to provide you with a \u201cforced savings account,\u201d Fuller says. If saving money is a challenge, you may find it helpful to contribute to your down payment or closing costs as part of your monthly rent payment.<\/p>\n Other advantages include:<\/p>\n When it comes to rent-to-own arrangements, Dunn, whose career includes 16 years as a legal aid attorney, is wary. \u201cI generally don\u2019t think it\u2019s a good idea,\u201d he says.<\/p>\n He cautions that these arrangements can be predatory<\/a>, targeting low-income renters and minorities. \u201cIt\u2019s really a transaction form that originated as a means of exploiting people of color that couldn\u2019t get access to the types of mainstream financing that\u2019s available to whites, and by and large, that\u2019s what it still is,\u201d he says.<\/p>\n You may be required to maintain the property and make repairs, an extra responsibility and expense many renters want to avoid. Worse, the property might be in bad shape, with the landlord using a rent-to-own setup as a way to avoid having to fix it up themselves, Dunn says.<\/p>\n Other drawbacks may include:<\/p>\n Let\u2019s take a look at a rent-to-own cost example that can give you a better idea of what to expect.<\/span><\/p>\n Let\u2019s say you enter a two-year rent-to-own agreement. The option fee is 4% of the home\u2019s $200,000 purchase price, or $8,000, which you\u2019ll pay upfront.<\/span><\/p>\n Your monthly rent is set at $1,600, with 20% of each payment ($320 per month) allocated to an escrow account throughout your two-year lease. When it\u2019s time to buy, you\u2019ll subtract the $8,000 option fee and $7,680 in rent credits ($320 over 24 months), lowering the effective purchase price by $15,680, to $184,320.<\/span><\/p>\n At that point, you can finance the remaining amount with a mortgage<\/a>, just like a traditional homebuyer.<\/span><\/p>\n There\u2019s more than one way to become a homeowner. For certain life situations<\/a>, a rent-to-own arrangement might make the most sense.<\/p>\n Most buyers require a mortgage to become homeowners. But if you have poor credit, that can be a significant barrier to getting a mortgage with a solid interest rate.<\/p>\n Renting a home, even just for a year or two, gives you the opportunity to strengthen your credit and qualify for a mortgage.<\/p>\n It can be challenging to save up for a down payment. By renting to own, you give yourself more time to build up your bank account. Plus, part of your monthly rent payment may be directed toward your eventual purchase.<\/p>\n Lenders might balk at providing a mortgage loan if your debt-to-income<\/a> ratio (your monthly minimum debt payments divided by your monthly gross income) is too high. While you rent, you can focus on paying down your debt.<\/p>\n If you found a home and location that will fit your needs for several years to come, a rent-to-own arrangement could pay off for you. Plus, you\u2019ll have peace of mind knowing you won\u2019t have to move.<\/p>\n Miller, who has more than three decades of experience practicing real estate law, has another point of view. Certain rent-to-own arrangements could work out if you\u2019re new to an area and like the house but need some time to decide if you like the neighborhood.<\/p>\n \u201cYou tie up the property, but at the same time, you\u2019re not tied up to it,\u201d Miller says.<\/p>\n Let\u2019s say you\u2019ve decided to move forward with a rent-to-own approach. Now you need to find the right house<\/a>.<\/p>\n Fair warning: This could be challenging. \u201cThe rent-to-own properties are not well organized,\u201d Fuller says. While prospective buyers can visit plenty of online sites to browse houses for sale, and prospective renters can do the same for rentals, there are not many websites that list rent-to-own opportunities, he says.<\/p>\n Your best bet is to follow these tips.<\/p>\n An agent<\/a> who has experience with rent-to-own transactions can be your best advocate through this complex process. Not only can they provide you with real estate knowledge and help you locate opportunities, but they can also help you to understand the terms and conditions that often accompany these types of agreements.<\/p>\n Most of his clients set out looking for a property to rent, Fuller says, then decide they\u2019d like to purchase the property they found once they\u2019ve rebuilt their credit or saved up for a down payment. In his experience, most landlords are receptive to an option agreement.<\/p>\n \u201cWhen we find the right property, and the right tenant, and the right landlord, a lease-option becomes very possible and can be a win-win for all properties,\u201d Fuller says.<\/p>\n Some companies offer rent-to-own programs, an option you can consider to reduce risks like having the homeowner go into foreclosure, or decide not to sell to the tenant at the end of the term. In this scenario, the company purchases the home and leases it to you, as the buyer. Once you\u2019re ready to purchase, you purchase directly from the company.<\/p>\n One example of this type of program is Home Partners of America<\/a>. Home Partners offers one-year rental leases that can be renewed for up to five years. Renters sign a \u201cright to purchase\u201d agreement, which sets a predetermined price should they decide to purchase the house from Home Partners.<\/p>\n Other programs are available through these rent-to-own platforms:<\/span><\/p>\n Maybe you or your agent have noticed a house that\u2019s been on the market for a while. Why not ask if the seller is interested in a rent-to-own arrangement? For the seller, the benefit is a monthly income stream. Your agent can approach the seller and make the suggestion.<\/p>\n Are you planning on staying in the area a long time? Is this property going to fit your family\u2019s needs years from now? Avoid \u201cbuyer\u2019s remorse\u201d by asking these questions up front, Miller says.<\/p>\n You don\u2019t want to end up with a house that\u2019s going to saddle you with endless repairs, or that will be worth less than your purchase price. Be sure to do your homework.<\/p>\n Repeat this mantra to yourself: no surprises. You want to do as much research as possible before you sign an agreement.<\/p>\n Does the seller really own the place? Make sure you are dealing with a trustworthy person. Miller warns: \u201cIf the landlord starts getting landlord\u2019s remorse, they will do everything they possibly can to get out of that agreement.\u201d<\/p>\n Talk to a couple of lending institutions before you sign anything. If your goal is to qualify for a mortgage in two years, ask what financial steps you need to take to achieve that goal. You can also look into getting pre-approved<\/a> so you know exactly what you\u2019ll be able to afford.<\/p>\n![\"homelight](\"https:\/\/www.homelight.com\/blog\/wp-content\/themes\/ccprototypev5\/images\/logo-small-cta.png\"){kind=logo}
\n <\/div>\n \n Work With a Top Agent to Find a Rent-to-Own Home<\/h3>\n
What is a rent-to-own home?<\/h2>\n
Understanding your options: lease option or lease purchase<\/h2>\n
Lease option<\/h3>\n
Lease purchase<\/h3>\n
How does rent-to-own work? 7 important things to know<\/h2>\n
1. Option fee<\/h3>\n
2. Purchase price<\/h3>\n
3. Rent payments<\/h3>\n
4. Rent credit<\/h3>\n
5. Maintenance agreement<\/h3>\n
6. Lease term<\/h3>\n
7. Closing the sale<\/h3>\n
Pros and cons of rent-to-own<\/h2>\n
Pros<\/h3>\n
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Cons<\/h3>\n
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Cost example for a rent-to-own agreement<\/h2>\n
Is a rent-to-own arrangement the right move for me?<\/h2>\n
You need time to improve your credit<\/h3>\n
You\u2019re struggling to save for a down payment<\/h3>\n
You\u2019re working on reducing your debt to buy a home<\/h3>\n
You plan to stay in the home for a while<\/h3>\n
How do you find a rent-to-own home?<\/h2>\n
Work with an experienced agent<\/h3>\n
Explore alternate options<\/h3>\n
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Approach a seller who\u2019s not having luck with the market<\/h3>\n
11 top tips for buyers considering rent-to-own<\/h2>\n
1. Think about where you are in life<\/h3>\n
2. Get an inspection and appraisal before signing your agreement<\/h3>\n
3. Research the property \u2014 including its title \u2014 before signing<\/h3>\n
4. Research the seller\/landlord, too<\/h3>\n
5. Consult with a lender before entering the deal<\/h3>\n
6. Watch out for scams and shady dealings<\/h3>\n