The real estate market has several solutions for both home buyers and home sellers. One solution for those who wish to buy a home, but don’t have the money for such a large purchase yet, is renting-to-own, also known as a lease option. People who choose this option will pay rent for the home that they live in, but are given the possibility of purchasing the home at a later date. The rent that people who choose the lease option will have to pay is higher than a regular rent, but the advantage is that part of the rent will be credited to the buyer if he or she decides to purchase the home.
A rent-to-own agreement allows the buyer to purchase the home that he is currently renting at any time before the agreement expires. The length of time in which the home can be purchased can be a few months or even years. Because the rent is higher than usual, sellers can afford to take their property off the market and rent it. However, if the renter decides to buy the property, he or she will be credited with a portion of the rent. This sum of money can be put toward a down payment and closing fees, or simply used for something else. If the buyer is unable to or decides not to buy the property during the lease option period, the entire amount that was paid as rent over the past months or years will remain with the seller.
Advantages and Disadvantages of Rent-to-Own Homes
The rent-to-own option is advantageous to sellers because it gives them an alternative to lowering the price of a home that they are having problems selling. By making a rent-to-own agreement with a buyer, sellers know exactly how much money they will be making if the buyer decides to go ahead and make the purchase. If home prices go down during the lease option period, the asking price for the seller’s home will remain unchanged, and the buyer might still want to buy the property because he or she has already invested money in it by paying a higher rent. The seller is also at an advantage because the rent money can be used to pay the mortgage, property taxes and insurance. Also, a renter who signs a rent-to-own agreement will most likely take better care of the property, because they are planning on buying it in the near future.
Buyers are advantaged by the rent-to-own option because it allows them to buy a home if they don’t have the money for the down payment, or their income is not sufficient. If a buyer believes that his or her income will increase in the near future, renting-to-own allows them to have a roof over their heads while having the option of buying the home at a later date, when their financial situation improves. Buyers are also protected from a home price increase during the lease option period, because the price of the home will be locked in.
Buyers also have almost all the advantages that regular renters have, like not having to worry about repairs, property taxes, and homeowners insurance. Another advantage of renting-to-own that the buyer has is that, by living in the home for a long period of time, he can find out if there is anything wrong with it. If buyers decide to walk away from the deal, they only lose the extra amount of money that they paid over regular rent, but if they decide to buy the home, they will be credited with a portion of the rent that they paid.
Like everything in the real estate world, renting-to-own also has its disadvantages. Most disadvantages are things that could go wrong with the rent-to-own agreement. Here’s what you should keep in mind and look out for:
- The seller’s financial situation. Try to find out if the seller is in any financial trouble. Red flags can be spots on his credit report, phone calls from debt collectors, or letters sent to the house. If the seller is in trouble, he can lose the home while you are still renting it. Meaning that you will lose the extra money paid as rent and you will have to find a new place to live.
- Repairs and maintenance. The rent-to-own agreement between you and the seller should clearly mention which party is responsible in case of damage to the property, and who is responsible with maintaining the property. During the renting period, you should have the same rights as any renter, meaning that the owner should take care of repairs and maintenance.
- The end of the rent-to-own period. If home prices have increased, the seller might not want to sell anymore. Unless you have the money to hire a lawyer and sue the seller, there is little you can do, so this is one of the risks that you are taking when renting-to-own. Also, if home prices go down and you want to buy the home, you will still have to pay the price that you and the seller agreed upon.
Renting-to-own is a good alternative for home buyers who expect their financial situation to improve in the near future, but not such a good option for those who are unsure of their income in the following months or years. Renting and saving money for the down payment can be a better choice than paying more for rent than having to abandon a home because you don’t have enough money to buy it.