What You Need To Know

Advantages and Disadvantages of Rent to Own For Buyers and Sellers

Have you heard someone mention rent-to-own houses and wondered what it meant? Rent-to-own homes are one means to enter the home ownership market.

Rent-to-own homes are becoming increasingly popular, especially for first-time home buyers. However, this type of home ownership has some definite pros and cons.

We will discuss both sides of the argument and help you decide if rent-to-own homes are the right choice for you.

What Are Rent-To-Own Homes?

Rent-to-own homes are a type of housing that allows people to rent a home and then potentially purchase it at some point in the future. It becomes a compromise for some would be home buyers who are not quite ready financially to make the jump into home ownership.

Some of the common reasons a potential buyer may not be able to purchase just yet include not having good enough credit or lacking a down payment.

Renting to own gets them into a house while at the same time saving money and building up their credit.

Renting to own is the compromise for the person deciding to rent or buy a home.

How Does Rent to Own Work?

When you rent to own a house, the home-buying process can take a long time. The buyer must find a property owner who is willing to enter into a rent-to-own agreement.

The buyer and seller will have a contract where the buyer can live in the home and pay rent for a specific time frame, with a percentage of the rent going toward the down payment.

Depending on the type of contract the tenant may or may not be required to purchase the home.

The tenant and landlord will agree on a monthly rent. Some of the monthly rent will go towards the purchase of the property. This is referred to as the rent credit.

Typically, a renter will pay a bit more than the market rental rate. The extra money will go towards the down payment to purchase the house at some point in the future.

There Can Be a Non-Refundable Upfront Fee

Rent to own agreements usually have a non-refundable upfront fee call an option fee. The option money is what gives a tenant the right to purchase the home in the future. The option fee typically ranges between one to five percent of the purchase price for the home.

What Are The Pros and Cons of Rent to Own Houses?

Let’s look at the pros and cons for rent-to-own properties for both the tenant and landlord.

Pros of Rent to Own Agreements For a Landlord

With rent to own homes the rent that a landlord collects is usually higher than the normal rental rate. It allows a landlord the potential to sock away extra money each month.

If the current real estate market favors buyers (buyer’s market), the owner doesn’t sell during a time where the home price will be lower than a seller’s market.

The owner will be getting a monthly influx of rental payments keeping their cash flow active. Rent-to-own agreements are almost always longer than a typical lease or tenancy at will agreement. The long term rental arrangement can be a big plus for a landlord.

Cons of Rent to Own Agreements For a Landlord

If the real estate market changes from favoring buyers to sellers, you will not be able to sell the property when you’re still in contract under a rent to own. When you have agreed on an upfront sales price you will not be able to renegotiate a higher sales price.

When home values skyrocket as they sometimes do, a homeowner could be out of a significant amount of property.

Additionally, when a buyer does not improve their credit and has to back out a seller will have a vacant rental to contend with.

Pros of Rent to Own Agreements For A Potential Home Buyer

With rent-to-own homes a potential buyer is able to get themselves in better position to join the ranks of home ownership.

While living in a home they really like, the buyer can work on saving money for a down payment to purchase. It also gives them time to work on doing everything necessary to increase their credit scores.

With better credit a more desirable home loan will be able to be achieved. Mortgage lender reward borrowers who have higher credit scores with more favorable terms including lower interest rates.

Another significant advantage with rent to own arrangements for a tenant is when they have locked in the price in a less desirable real estate market. If the market changes from favoring buyers to sellers a much lower price is already locked in.

The tenant upon purchasing the property would have additional equity.

Cons of Rent to Own Agreements For a Potential Home Buyer

It is possible that if you have not put time and effort into increasing your credit score, you might not be in position to buy the house. When you don’t do what it takes to improve your finances, the option fee money could be lost. All the rent money paid would have been for naught.

There are always unforeseen circumstances out of your control that could derail your ability to purchase such as losing your job, a divorce, or some other financial catastrophe.

While the percentages are smaller, you could also find yourself dealing with unscrupulous landlord who bilks you out of money. With rent to own contacts you will be paying higher monthly rent for the opportunity to purchase the property. As with many things in life there are pros and cons to both parties in this type of real estate transaction.

About the author: The above article on “The Pros And Cons Of Rent To Own Homes: What You Need To Know” was written by Bill Gassett. Bill has been working in the real estate industry for the past thirty-three years. He works for RE/MAX Executive Realty in Hopkinton Massachusetts. Bill loves providing trustworthy information to buyers, sellers, and fellow real estate agents to make the best possible decisions. His writing has been featured on RIS Media, National Association of Realtors, Inman News, Placester, Today.com, Credit Sesame, and others.

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