Rent To Own Homes

Owning a home goes hand in hand with living the American dream. Years are spent saving up money for a deposit. People spend years focusing on their credit score to make sure that they are able to find financing for their future homes. During these times, people are often renting their homes.

However, most people often imagine how nice it would be if their rent were going towards the purchase price of their home. This is how most rent-to-own agreements work, and they sound like a dream come true. However, there are a few reasons why you should avoid rent to own homes. It’s always important to do your research before deciding whether an option is right for you.

How Does Rent To Own Work?

Rent-to-own agreements are also known as a lease-option agreement or a lease-purchasing agreement. Most of these terms mean the same thing, but there are a few key differences to watch out for.

A lease-option agreement is when a tenant has the choice to purchase the home once the lease period is up. It is not a requirement. These are often popular because the tenant has the option of purchasing the home, and they can choose not to. It’s nice knowing that there is no obligation and no penalty for choosing not to purchase a home.

A lease-purchasing agreement is when the tenant is required to purchase the home once the lease period is up. Often this involves a legally binding contract.  A person is required to buy a house instead of having the option of buying the home. They are expected to already have financing in place on the specified date.

When purchasing a house through a rent to own agreement, the tenant signs a rent-to-own agreement and often pays a fee at the beginning that is not refundable. The agreement lays out the guidelines for the tenant to purchase the home directly from the owner.

There is no mortgage or credit check required, which makes this sound extremely appealing for individuals that do not have a high enough credit or income to qualify for a mortgage or other financing options.

Often, tenants will start paying rent and a portion or all of the rent will go towards the cost of the house.

Advantages Of Rent To Own Homes

While a rent-to-own agreement might sound a little too good to be true, they aren’t always a bad idea. In fact, there are quite a few great things that can come from a lease-purchase agreement.

Few Eligibility Requirements

One of the main appeals behind a rent-to-own agreement is that they are often an agreement between the renter and landlord. These agreements usually happen more organically and don’t require a high credit score or high-income level.

Often Benefit Both The Owner And Buyer

Typically, a rent-to-own agreement will benefit both parties. A homeowner that wants to sell a house but doesn’t have the extra money to complete necessary upgrades will be able to sell easily because they have a tenant interested in buying the property.

Lock In The Purchase Price

The real estate market is rather volatile. One year house prices will be up, and another year they will be down by the thousands. If the market is great for buyers, it lets them lock in a wonderful purchase price that won’t change based on the market.

The Downfalls Of Rent To Own Homes

While these agreements sound like a dream come true, there are a few drawbacks that renters need to consider before signing a rent-to-own contract on the dotted line.

Renters Pay More In Rent Every Month

Renters often pay more every month to the landlord than they would if they were renting the house or paying a mortgage payment. This can put a strain on finances if you’re barely making your rent payment as it is.

Paying Less Towards The Cost Of The House Than You Realize

Most people assume when they sign a rent-to-own contract that the full amount that they pay to the landlord will go towards the cost of the house. However, that’s not always the case when it comes to a rent-to-own home.

Often, renters will pay the landlord a fee, and the rest of the payment will go towards the purchase price. This is stated in the fine print of rent-to-own contracts. Essentially, renters are paying the landlord to rent-to-own a home.

For example, if a tenant pays the landlord $500 per month, there is a good chance that only $400 per month will go towards purchasing the home.

In addition to this, there is usually an upfront fee that is paid. On occasion, none of this fee will go towards the purchase price. Other times, only a portion of the fee will go towards the purchase price of the home. That’s why it is critical to read the fine print on rent-to-own contracts.

You Can Often Lose The House For One Late Payment

Rent-to-own contracts can have stricter terms than purchasing a home with a standard mortgage. Some people have found that they lost their rent-to-own home after missing one payment, or having one late payment.

Most Contracts Require An Upfront Fee

This upfront fee varies depending on the contract. Some or none of it may go towards the purchase price of the home, and it’s typically non-refundable. That means that you may pay the fee, but it might not go towards the purchase price of the home, and then you won’t get it back if you lose the home.

You Have To Pay For Any Repairs

During the rental period, it’s common for landlords to cover repairs. However, once you sign on the dotted line, the rental payment is no longer to rent the home. That means that repairs are often going to be your responsibility, just as if you had purchased a home with a standard mortgage.

However, there is a downside to this, even though it makes sense. You are paying for repairs in a home that you don’t technically own yet. There’s always a chance that the deal could fall through. That means that you could pay thousands of dollars for a new roof, to waterproof the basement, and for new appliances only to have to walk away from it all because you missed one payment.

Plenty Of Scams And Shady Landlords Use Rent To Own Schemes

Because rent-to-own homes are so tempting for people, it’s common to see people using them to scam other individuals. Scammers use the low monthly payments to entice low-income individuals into thinking that they are buying a home.

To avoid scams, consider speaking with a real estate attorney before signing a contract to make sure that you are not getting scammed.

You also need to make sure that the landlord actually owns the property. There are thousands of scams every year that involve individuals “selling” properties that they don’t actually own.

Sometimes, tenants find out a little too late that there are years worth of back property taxes that have never been paid.

Make sure that you get a home inspected before agreeing to a rent-to-own contract. Some homes have hidden problems, such as mold or asbestos, that potential buyers might not notice without having the home properly inspected. Rent-to-own renters are less likely to have those inspections performed when compared to someone that is purchasing a house off the housing market.

It’s also common for landlords to suddenly rent-to-own homes that are headed for foreclosure. They earn a few quick bucks and the tenant is none the wiser. Make sure that you know the status of everything regarding the house before deciding that you would like to sign a rent-to-own contract.

Locking In A Bad Price

While it can be a great bargain if you manage to lock in a great price, it can be a huge disadvantage if homeowners lock in a bad price. The market consistently fluctuates, so it’s important to consider market trends before agreeing to a rent-to-own contract.

Purchasing Through A Lease-Option Contract Still Requires Financing

A rent-to-own contract sounds ideal, but it doesn’t always work the way that people assume it does.

In a lease-option contract or a lease contract, the tenant often rents the home for a period of time. This is designed to give them the time needed to increase their income or credit to qualify for a mortgage. At the end of this period, the tenant is still required to obtain financing in order to purchase the home.

Other Home Buying Options

Investing in a rent-to-own property is risky no matter how you go about it. Instead, consider other options for buying a home! Saving up a down payment and taking a few years to get your credit under control can be well worth it in the long run.

iBuyers

iBuyers, such as Offerpad and OfferUp, are a popular way to sell homes fast. They also offer quite a few opportunities for individuals to buy homes. While the house may need a few repairs, and most buyers will be responsible for closing costs, it can be well worth it to avoid potential scams.

However, make sure that you do your due diligence when working with an iBuyer as well. Working with a reputable iBuyer and having the home inspected are both important.

Real Estate Agents

Working with a real estate agent is one of the most common ways to purchase a home. Often, this does require having money for things like a down payment and inspection, among other things. Home buyers will need to have the credit to qualify for a mortgage.

However, most people can trust that when they are working with a professional real estate agent that they are going to be genuinely buying a home instead of getting scammed into paying someone, and never actually buying a home.

There are a few downsides to working with a real estate agent, though. Real estate agents often charge higher fees than iBuyers and may charge hidden fees. If you’re considering working with a real estate agent, it’s critical to work with a reputable real estate agent that has an extensive amount of knowledge in the real estate market.

Buy From A Friend

Purchasing a home from a friend is often an easier way to purchase a house. This is particularly true if someone is planning on spending cash to purchase a home. Often, this process is similar to purchasing a home from a real estate agent or iBuyer. Buyers will need to have a professional inspection completed, and will still need to obtain financing.

Should You Purchase A Rent-To-Own Home?

There are good and bad things about purchasing a rent-to-own home. If you know the landlord well and are confident that you are not going to be scammed, it can work well for both yourself and your landlord. A lease option can give tenants the time that they need to decide if they would like to purchase a home or obtain financing.

However, it’s always important to have the home properly inspected. Next, make sure to read the fine print on the contract. If you do not have previous experience in purchasing homes or are not familiar with real estate jargon, consider hiring a professional attorney to review the terms and conditions with you to ensure that you are not getting scammed, or wasting your hard-earned money.

In Conclusion

When in doubt, look at other options. It’s always best to consider other ways to purchase a home instead of dealing with the many potential downfalls that go hand in hand with a rent-to-own home. Check out this blog for more information about purchasing a home.