Since the financial crisis of 2008, rent-to-own models have become more common. This came after large real estate investment companies purchased foreclosed homes and implemented this new way of renting a property. A rent-to-own agreement is when tenants pay a portion of their rent towards accruing a down payment. This down payment will be used to purchase the home they’re currently renting.
With this model becoming more common, how do you know if it’s a good deal? What are the pros and cons of the rent-to-own deals you see today? Let’s take a closer look to determine what’s the best option for you.
What is the Rent-to-Own Process?
If you need a mortgage to purchase a home like most buyers, you’re probably struggling to get enough for a down payment. As the mortgage requirements get stricter, many prospective home buyers are looking for more ways to save money. Buying a home is becoming more of a challenge than ever.
Rent-to-own agreements offer an alternative way to save money for a home purchase. When you enter such an agreement, you do so with the intention to buy the house after the duration of the lease. The agreement usually specifies the purchase price, and you might pay an “option” fee, which means you have the option to purchase the home at the end of your agreement.
Your rent-to-own monthly payment might not be the same as a traditional rent payment. Usually, a portion of your rent payment is applied towards that eventual purchase price. So if you’re paying $1500 in rent and 25% of that is going towards the purchase price, after 2 years you’ll have earned $9000 towards purchasing the home.
What Are the Pros and Cons?
Renting-to-own is a great option for those looking to buy a house in the near future but who can’t afford it yet. It can be helpful to have a structured saving plan built into the home. However, it’s still a big decision and one you shouldn’t take lightly.
- Bad credit – You can enter this agreement even with bad credit. This gives you a few years to work on your credit until you can afford a home loan.
- Purchase price – If you’re in a market with increasing home prices, it’s nice to lock in that price early while you save for your home.
- Experience the home – Because you get to live in the home, you’ll know if it’s the right place for you before you committ to buying.
- Equity – Finally, since a portion of your rent is put towards the value of the home, you’re able to build equity in the property.
- Slow progress – Spending years taking the time to own a house might be too slow of a process for some people.
- Losing money – If you don’t purchase the home at the end of the agreement, you lose the extra money you paid each month.
- Maintenance – Depending on your agreement, you could be responsible for maintaining the property.
- Falling Prices – Finally, prices do fall. If the price of the home lowers, you might not be able to negotiate a lower purchase price.
As you can see, there’s a lot to consider before you enter a rent-to-own agreement. It’s best to treat this the same as you would purchasing a home outright. You’ll want to get the home inspected and do a title search to make sure it’s in good standing before you take on this contract. Ultimately, rent-to-own might be a great way to save for a home while you build your credit, but make sure you know what you’re getting into.