The rent-to-own agreements usually include several financial commitments that are beyond standard rent. One of the first is the option fee, which secures your right to purchase property later.
This fee typically ranges in between 1 and 7% of the home value and is usually non-refundable. While there are some agreements that can be applied towards the purchase price, however, you must confirm how it will be used before signing.
The monthly rent in a rent-to-own arrangement is usually higher than the going market rate. This is because a portion of your payment will be earmarked for the future ownership.
For the tenants, however, this means balancing the benefits of building credits towards a down payment with the reality of paying more every month.
Another key detail is the purchase price itself. In several cases, the price is agreed upon at the beginning of the contracts, which can be an advantage in markets where home values are rising frequently.
However, if the market somehow declines, you will end up paying more than what the property is usually worth.
Maintenance responsibilities, property taxes, association fees, and insurance should also be clearly outlined in the agreement. Some contractors pass these costs onto the tenants even before they officially become the homeowners.
Advantages of Rent-to-Own
One of the most favorable benefits of rent-to-own is the ability to work towards homeownership while living in the property.
This is especially valuable for renters who need time to improve their credit scores or save money for a traditional down payment.
Rent-to-own agreements also allow buyers to lock in the purchase price, which can be a protection against the rising housing markets.
Talking about the practical advantage of rent-to-own, is that tenants who go on to purchase the home do not have to usually deal with the cost and disruption of moving.
Living in the property during the lease term will also give renters a chance to experience the home and the neighborhood firsthand, which will help them make a better and more informed decision about whether to buy the property or not.
Disadvantages of Rent-to-Own
While rent-to-own has its perks, there are certain disadvantages that can make you hesitant to opt for this. The most significant is that all the upfront option fees and all the accumulated rent credits are forfeited if you do not purchase the property.
That means thousands of dollars, all gone. Secondly, higher rent payments can also strain monthly budgets, making it more difficult to save outside of the agreement.
There is also another risk, and that is overpaying. If the property values decline, somehow you may still be locked into the original purchase price, potentially leaving you with negative equity.
Additionally, tenants might be responsible for repairs and maintenance during the lease, which further adds unexpected costs.
Who Should Consider Rent-to-Own?
Rent-to-own is a good fit for people who have good and stable income but lack the savings needed for a large down payment.
It is also a great option for renters with less-than-perfect credit who need time to strengthen their financial profile before applying for a mortgage.
This arrangement is also beneficial for tenants who are committed to staying in the same area for a long time.
If you are, however, unsure about your job stability, lifestyle plans, or the property itself, the financial risks of a rent-to-own arrangement will likely outweigh the potential benefits.
Protecting Yourself in a Rent-to-Own Agreement
Rent-to-own contact varies widely; it is advised to review all the terms carefully. A professional home inspection should be conducted before signing, just as you would in a standard home purchase, to uncover any structural or maintenance issues.
It is also essential to confirm that the seller is financially stable, is currently on property taxes, and has clear ownership of the property.
It is advised to work with a real estate attorney or a property management company, so they can provide additional protection and explain complex terms, make sure your credits are properly tracked, prevent scams and, most essentially, confirm that your agreements are compliant with the local laws.
A good property management company understands the nuances of the risks, such as fake landlords, undisclosed foreclosures, importance of professional guidance, and legalities.
However, if you are already in a rent-to-own arrangement and are wondering, can a landlord break a rent-to-own contract? Seeking help from an experienced property manager will be beneficial to you.
The Bottom Line
Rent-to-own agreements also offer an alternative path to homeownership for renters who are not ready or able to buy immediately. This will give them the time to improve their credit, build savings, and secure a safe future home.
However, they also involve higher costs, financial risks, and strict contractual obligations. Before signing a rent-to-own contract, try to carefully evaluate your financial stability, the condition of the property, and the fairness of the purchase term. With the right preparation and professional guidance, rent-to-own can be a useful path towards ownership.
