Rent to Own
Rent-To-Own Housing Options
If you want to own real estate, a potential opportunity to do so is through a rent-to-own program. Whenever you consider doing a rent-to-own program, be sure you understand all of the potential costs and long-term potential issues involved. Always consult an attorney before signing contracts for real estate purchase options, especially to review the contract terms of a renting to own (sometimes called a lease-to-own transaction) real estate.
Federal housing assistance programs offer some help with home purchases, including the option to apply housing vouchers toward a real estate purchase. However, these vouchers cannot be used for a rent to own option, unless you purchase the privately rented home you were applying vouchers toward, which is not a rent-to-own contract specifically. You can use the Housing Choice Voucher Program (formerly Section 8) for either rental assistance or for homeownership assistance.
In a rent-to-own agreement, a potential buyer signs a contract to rent the home, usually for a period of one to three years, before having either the option or the requirement to purchase the home. If you are unable to secure traditional homeownership lending assistance, a rent-to-own option might work for you. You can rent the home you want to buy until you are able to make the purchase.
Depending on the contract agreement terms that you enter into with a rent to own agreement, you might have the option to purchase the home before the lease ends or at the end of the lease terms. The “option” is an important consideration. If your contract terms do not indicate that you have the option to purchase, then you might be required to purchase the home and can face legal action if you are unable to or choose not to purchase at the time indicated.
With the “option” to purchase during the lease or when the lease ends, you can determine if this home is the right real estate purchase for you to make. If you still cannot afford it or do not want to purchase it, you have the option to move out and move on to a new home. If, however, the “option” is not allowed in your contract, then you will be required to purchase the home at the conclusion of the lease contract. Be sure you understand the exact terms of your contract agreement before you sign anything.
Rent-To-Own Contract Terms
Rent to own contracts can be written on behalf of an individual homeowner or by a company that runs rent-to-own operations around the country. If you are entering into an agreement with a company, it is important that you meet with a representative of the company and that you have an attorney involved in the proceedings of the rent-to-own contract agreement signing.
You must be cautious with the rent-to-own option and ensure that your contract is feasible and that you fully understand the requirements and ramifications for any issues. Some contracts might require you, as the renter and would-be buyer, to invest large sums of money into repairing or upgrading the home. If you are able to and intend to purchase the home anyway, then investing your own money simply builds your own equity. However, if you will not own the home at the end of the lease agreement, then you will have invested much more than just a monthly rental payment into a home you do not own. Be sure you understand who is responsible for what maintenance costs and the types of repair work required of you as a renter.
Rent-to-own properties can provide potential homeowners with additional time to save up for a traditional down payment or to try to improve their credit score to qualify for a loan or better mortgage rates. This time could also be used for financial counseling.
However, rent to own contracts are typically very strict on their monthly requirements for would-be buyers, with harsh ramifications if any payment is missed along the way. In many rent-to-own contracts, missing a single payment or submitting a single payment late could be grounds for immediate eviction. Tenants should make sure they know exactly what terms are included in the contract before signing the agreement.
Benefits of a Rent-To-Own Contract
With a rent-to-own agreement, you get to move into a home immediately, which is ideal if you have found your dream home but are not yet in the right position to make such a large real estate purchase. The rent-to-own agreement will offer you additional time to save for the down payment or to improve your credit score in order to make the purchase possible at the end of the agreement.
If your contract includes the “option” to purchase the home, renting the home for a set period of time also offers you a better opportunity to see if this specific home is a worthy real estate investment for you. While a quick visit during a real estate open house can show you the best of a home, actually living there for an extended period of time can help you determine if the house is right for you. During the rental period, you can see what the neighborhood is like to determine if there are major structural problems or necessary repairs to make, and you can decide if this exact home is the right choice for you.
Drawbacks of a Rent-To-Own Contract
When you sign a rent to own contract, you often have to pay a nonrefundable fee, which is sometimes called the option fee. This is a payment made to the homeowner or company to ensure that nobody else can purchase the home during the time period of your lease when you can decide to purchase it yourself or not. This fee will not be refunded if you choose not to purchase the home.
Additionally, some rent-to-own contracts may charge higher than average rental prices for the area. If you end up purchasing the home, a percentage of your rental payments is typically applied to the total cost of the real estate purchase, meaning that the extra you pay each month might be applied toward the property purchase itself anyway. You must make sure you know how much is being applied and understand that, if you do not purchase, you also will not be refunded that extra cost.
Remember, if there is a purchase “option” explicitly written into the contract, then you can choose whether or not to buy the house when the lease expires. However, some rent-to-own contracts legally obligate you to buy the house when the lease expires so you will have no choice and will have to purchase the home – sometimes in full. Be absolutely sure you know which agreement type you are entering into and have a real estate attorney review all paperwork before you sign.
Something you must be aware of and watchful for are unfair practices in the rent-to-own markets. If you are considering a rent-to-own agreement, be sure you fully understand the terms of the agreement, have the property inspected prior to signing any lease or contract and make sure the company or owner you are working with is reputable.