You may have noticed it more recently. Many Americans are talking about Rent-to-Own options when it comes to home buying. However, a lot of people don’t understand what that really means as a buyer or as a seller. It’s actually pretty important to understand Rent-to-Own options because that may be something that could benefit your current financial situation!
Rent-to-Own housing agreements provide buyers the opportunity to lease a property with an option to buy at the end of the lease. Not only could this be a good option for home buyers, but for sellers as well. Just like anything in life, there are both pros and cons associated with a Rent-to-Own agreement. Before deciding if this is something you want to pursue, you should consider these aspects!
What is the Definition of Rent-to-Own
This is a type of contract that states that the buyer will lease the property for a period of time. Rent-to-Own contracts are another option to consider instead of a traditional home loan. Once the lease is done they have the option to buy the home afterwards. These agreements are broken up into two parts:
- The Standard Lease Agreement
- The Option to Buy
There are also different contract types that you may encounter. You could have a lease-option contract or a lease-purchase contract. When you have a lease-option contract, you have the ability to choose whether or not you will buy the property. On the other hand with a lease-purchase contract, you will be required to purchase the home at the end of the lease term.
The setup varies depending on your agreement. You typically pay rent throughout the lease. In some instances, a portion of the payment will be applied to the purchase price. The requirements of the agreement will vary as well. Some contracts may state that you are responsible for maintaining the property and handling the repairs of the house.
How do Rent-to-Own Agreements Work?
The purchase price of the home is set by the seller and the buyer within the agreement. The contract will also detail the pricing conditions like the rent, whether or not the rent will go towards the purchase price of the home, the requirements of the seller, and the requirements of the buyer.
As you set the pricing information, you may notice inflated prices. That is because sellers try to anticipate the value of the home increasing over time. When it comes time to purchase the home at the end of the agreement, people typically opt to get a traditional mortgage to finance the home.
Should I Consider a Rent-to-Own?
Everyone is different so you will need to look at your current situation. It may make sense for you to opt for this home option! People typically prefer Rent-to-Own agreements if they have less than ideal credit, or need more time to get their finances together for a down payment. You need to consider factors like your budget and the current housing market. You can also consider the Price-to-Rent ratio when deciding whether you want a Rent-to-Own agreement.
What is a Price-to-Rent Ratio?
A Price-to-Rent ratio (also referred to as a Price-to-Rent index) is a benchmark that is used to figure out whether you should rent or own a property. It can also provide insight as to whether or not housing markets are valued at a fair price. This is a ratio that looks at the home prices compared to the yearly rent in a specified location.
Advantages of a Rent-to-Own When Buying
Buyers have their own advantages and disadvantages when it comes to dealing with Rent-to-Own agreements. Some of the best benefits are:
- Bad Credit Eligibility
- Purchase Price Security
- The Ability to Try Out the House
- Location Stability
Understanding the Advantages
You want to have a more in depth look at the benefits when considering a Rent-to-Own agreement.
- Bad Credit Eligibility: Credit building is hard. That is why you may benefit from a Rent-to-Own when trying to buy a house! People that may not be eligible for a home loan can go with this type of contract. During this time, they can work on building their credit so that they have a better chance at qualifying to purchase a home at the end of the lease term.
- Purchase Price Security: The housing market is constantly changing. When you enter a rent-to-own agreement the purchase price of the house is locked in. Typically the seller accounts for this and will inflate the cost of the purchase price. However, you know the price going into the agreement so the housing market won’t affect you when the leased portion of your agreement is complete.
- The Ability to Try Out the House: A home is a big purchase! It can be worrisome to move in without getting a feel for the home first. You may not like your neighbors, not like the location, etc. With a Rent-to-Own, you can get a feel for the house before you commit to buying.
- Location Stability: Instead of a property in another location, you can choose to stay in your current home at the end of your lease. This can provide more location stability since you won’t have to move as much! Saves you a hassle in the end.
Disadvantages of a Rent-to-Own When Buying
Even though there are some nice pros, there are some cons that you need to be aware of as well. Some disadvantages with a Rent-to-Own agreement are:
- Less Control Over the Home
- Inconsistent Pricing
- Issues with the House
Understanding the Disadvantages
Some of these disadvantages may sound bad. However, they may be more manageable than you realize.
- Scams: In some contracts, if you don’t buy the home then you could lose extra money you had paid. If your seller is shiesty then they may try to make it difficult or unappealing for you to buy the property. This can provide the seller an opportunity to keep the money you gave.
- Less Control Over the House: In the beginning of your Rent-to-Own agreement, you don’t own the house. You lease it. Since you do not own the property, you don’t have full control of it even though it may feel like you own the home. You run the risk of your landlord not being responsible with mortgage payments. If your landlord doesn’t handle their responsibility then the house could foreclose regardless of the occupancy status. Not only do you run this risk, but you could also have no say in regards to home renovations. If the homeowner wants to make that change, it is within their rights. You want to make sure your agreement details any and all scenarios where the landlord could affect your situation.
- Inconsistent Pricing: Since housing markets change all the time, it could easily fall. If the market falls, so could the value of your home. When it is time to purchase the home, the price may be higher than the home’s value.
- Issues with the House: Sometimes there may be issues with the home that you don’t realize until it’s time to purchase the home. For example, the house could have titling issues. That is why it is important to fully prepare for this agreement before signing it in the first place. Make sure to have a home inspection and title search done!
This is a big purchase and should get treated as such. You will want to consult a professional when going through this process. It may benefit you to get into contact with a real estate attorney. They can make sure that you are best equipped to handle anything that may pop up.
Sellers also have advantages and disadvantages to keep in mind when considering a Rent-to-Own agreement.
Advantages of a Rent-to-Own When Selling
Sellers need to keep the benefits in mind when figuring out whether or not they want to do a Rent-to-Own agreement. Some benefits to sellers are:
- Higher Number of Buyers
- Another Source of Income
- More Expensive Home Purchase Price
- Better Renters
Understanding the Advantages
The benefits may be able to outweigh the negatives. For this reason, you should make sure you have an idea of some of the potential benefits that you may face!
- Higher Number of Buyers: When you open up a financing opportunity, you naturally attract more buyers. A larger variety of consumers can consider your home for sale.
- Another Source of Income: The first portion of the Rent-to-Own agreement is the lease. The money you get from rent can be viewed as another source of income.
- More Expensive Home Purchase Price: Rent-to-Own agreements provide an opportunity to sellers. You could raise your asking price in these agreements.
- Better Renters: When people rent apartments, they usually don’t consider them “forever homes”. That’s because they aren’t buying them. Rent-to-Own renters are a different story. They likely plan on moving into this home once their lease is complete. They have a higher chance at taking care of the property while they are living there since the end goal is for them to stay there.
Disadvantages of a Rent-to-Own When Selling
There are some nice benefits that go along with Rent-to-Owns as a seller. However, there are some drawbacks to be aware of as well. Some of the biggest drawbacks are:
- The Renter May Not Purchase
- It’s Slower to Sell Your Home
- Potential Loss of Appreciation
- Decreasing Home Prices
Understanding the Disadvantages
These disadvantages should definitely be considered. Being a seller in a Rent-to-Own agreement has some drawbacks that may be too much to deal with.
- The Renter May Not Purchase: At the end of the lease, the renter may not purchase the home. If this happens, you essentially rented your space for a set period of time for “no reason”. Luckily, you still keep the money you earned from their time as renters but you will need to begin the home selling process all over again.
- It’s Slower to Sell Your Home: When people list their homes on the market, they usually don’t want them to stay there long. When you have a Rent-to-Own agreement, they could be there for years before buying the home. This pushes back when you may have planned on selling your home if you chose the traditional way.
- Potential Loss of Appreciation: When you sign a Rent-to-Own agreement, you set the purchase price of the home. Even if you try to account for rising home prices, they could surpass that guess. If they do then you sold your home for less than you could have.
- Decreasing Home Prices: Housing markets are constantly changing. If at the end of the lease your renter doesn’t buy, and property value dropped, then you are taking a loss.
Rent-to-Own agreements are flexible in their terms. Both parties can discuss terms they agree upon to try to accommodate everyone. It may benefit to have a professional assist in the process.
Have More Questions?
Have more questions about Rent-to-Own agreements? No problem! Talk to a Rent-to-Own expert today at no cost to you. Give a call at 1-213-306-4592 and someone will be happy to help!