Rent-To-Own Agreements: Worth Considering?

“Rent-to-own” is a popular, intriguing term but few people actually understand what it entails. These agreements, between an owner and a renter, are set up so that the renter is eligible to rent the property until it is entirely paid. The agreements can function in a variety of ways, therefore the term is often considered all encompassing. Since seller financing has certain advantages, many people seek out rent-to-own options rather than requesting assistance from a bank. It is important to understand the pros and cons prior to signing a rent-to-own contract.

Understanding Rent-To-Own Contracts

Typically, rent-to-own contracts allow tenants to rent a property for a set period of time, usually one year. Upon completion of the term, renters are given the option to purchase the home. The money (either all of it or a portion) they paid each month for rent is applied to the sale price of the property. Some owners may also offer a credit on closing costs. Each scenario is unique.

Each agreement outlines a predetermined sale price. For this type of deal, most landlords will request about three percent down. At the end of the lease term, the renter is bound to the predetermined sale price. Also, the owner is not allowed to sell the property to anyone other than the renter during the lease period.

Why Are Rent-To-Own Agreements Appealing?

Rent-to-own agreements are especially appealing to individuals with bad or no credit. These agreements can also be beneficial for buyers that are unable to come up with a 20 percent down payment. Qualifying for a traditional mortgage is becoming more of a challenge. If an individual has been slow to make mortgage payments or foreclosed on a property in the past, it is unlikely a bank will agree to another mortgage for at least 7 to 10 years.

Rent-to-own agreements have both positive and negative aspects. In some cases, it enables individuals to relocate to a highly-desired area. Others view these agreements as a way to be a homeowner without being tied to a 30-year mortgage.

Rent-To-Own Contracts: The Pros and Cons

One of the main benefits for potential buyers is the ability to lock in the sale price of their desired home. They are then allowed to live in that home for an extended period before making their decision. Plenty of people move to a new home and realize later how much they dislike the neighbors, neighborhood, or the actual home. With a 30-year mortgage, it is not easy to get up and move away. However, a rent-to-own contract allows renters to simply leave once the term is up if they realize the home or area is not what they hoped.

One of the pitfalls of a rent-to-own contract is that the monthly rental payments are often higher due to the convenience of the situation. A portion of the higher price also goes toward the final sale price. Unfortunately, if the deal is canceled, any extra money paid to the owner will be forfeited. Tenants are also usually responsible for covering the cost of necessary upgrades, maintenance, or back taxes.

Under a “land contract”, an agreement filed through the courts, the scenario becomes a bit more complicated. If the renter fails to keep up with their payments, the renter is faced with eviction and a foreclosure on their record.

Are Rent-To-Own Agreements a Good Idea?

A New York priest mentioned to a local newspaper how a rent-to-own agreement benefited him when he had a heart attack and was forced to retire earlier than planned. Fortunately for him, he found a rent-to-own agreement with no extra fees and he was able to buy the home after a year.

Although scenarios like this can be beneficial for some, the majority of real estate agents do not think these types of arrangements make sense. This is particularly true for individuals who are disciplined with their finances. Some realtors believe rent-to-own scenarios are risky for both the owner and the renter.

If a deal does require special arrangements, most real estate professionals recommend doing a lease with an option. At the end of the term, an individual can continue renting the home if they are unable to pursue a mortgage.