Rent-to-Own Homes: Are they really a good deal?

If you’re in the market to buy a new home, you may have heard the phrase rent-to-own homes as an alternative to the more traditional home buying process. But how do rent-to-own homes work? It seems like it’s a pretty easy guess based on the title, but there are some processes and benefits from rent-to-own homes that you don’t get anywhere else. 

How Rent-to-Own Homes Work

What is a rent-to-own home?

First things first, let’s define what a rent-to-own home is. 

A rent-to-own home is a home you lease before purchase. You live in the house and pay rent, part of which goes to the home’s mortgage payment, and at the end of the leasing agreement, you can either buy the house for the remaining balance or walk away from the property like you would a standard rental.

It’s important to note that you need to have a contract that specifies that you have the right to buy the house at the end of the lease agreement. If you don’t have that in the contract, then you’re liable to purchase the home whether you want to or not. 

How do you find rent-to-own homes?

There are several ways to find rent-to-own homes in your area. 

  1. MLS, or multiple listing service, is where you find homes that have been listed for sale, and rent-to-own homes are listed there as well. 
  2. Craigslist
  4. Zillow

Some realtors will be willing to help you find rent-to-own homes, as well. Regardless of whether you use a realtor or not, it’s essential to look at what’s currently on the market, so you have a good idea of what you like to show to your realtors to ensure your home search is efficient. 

What to expect on a rent-to-own contract

Rent-to-own contracts are different from a typical rental or lease agreement, so it’s good to know what they should include. The rent-to-own contract includes some things that you’re used to seeing:

  • Tenant/buyer Name and Address
    • This will be your name, as you will be the renter/eventual owner.
    • If you choose a lease option, then you’ll have the ability to walk away from the deal without buying the house once the lease agreement is done.
  • Landlord/Seller Name and Address
    • This is the name of the seller/landlord
  • Monthly rent
    • This will be how much your monthly rental payments will be
    • It’s important to understand and have in writing what portion of your rental payment will be going towards the mortgage.
  • Utilities and services
    • Like a regular rental property, there may be utilities and services included
  • Fees
    • Move-in fees, pet fees, etc. Expect the fee structure for a rental property.
    • The big difference between rent to own and a typical rental agreement is the Option Fee. The option fee is like the downpayment and will typically be between 1-5% of the overall cost of the home.  
      • The option fee is nonrefundable, so if you decide not to buy the house at the end of the agreement then you would not recoup that fee.
  • Purchase price
    • This is where the purchase price of the home is listed. 
  • Closing Date
    • This is the end date of the contract; on this date, you’re expected to have paid the rest of the balance for the house, 
  • Property disclosures
    • A property disclosure is a statement that contains all of the information about the knowledge and condition of property itself. 

Be sure that you understand all parts of the rent-to-own agreements before you sign it. Have a lawyer or a realtor look it over to make sure everything is where it should be. 

Do rent-to-own homes have down payments?

Rent-to-own homes do have down payments, but they’re called option fees. An option fee is more than a rental deposit but less than traditional down payment. Typically, the option fee is 1-5% of the overall purchase price. 

How do you qualify for a rent-to-own home?

The rent-to-own route is perfect for people who can’t yet qualify for the traditional home owning process. One of the many benefits of the rent-to-own option is that while renting, you’re not just paying money towards a mortgage payment but the lease agreement term gives you time to save more money so when the time comes to buy the home, your finances will be in order. 

Rent-to-own agreements are geared towards people with low credit scores and finance issues that wouldn’t typically qualify for more traditional home loans. In order to qualify for a rent-to-own property, you’ll need to have an acceptable credit score (this can vary by seller) as well as enough money to pay for the option fee and other fees. 

What are the warning signs that a rent-to-own home situation isn’t good?

While there are plenty of excellent rent-to-own options available, there are always people looking to take advantage. Here are a few warning signs to know about to ensure your rent-to-own home is legit.

  1. Meeting in person. If a seller doesn’t want to meet in person, that should be a red flag. You’ll want to meet them or a representative to go through the property to ensure that it actually exists.
  2. See the property in person. If the seller wants you to move in right away without seeing the property in person, be weary. People can pull pictures online from other homes and make it seem like it’s a property they have to rent. Be sure to see properties in person, and if you can’t because you are out of town or state, have someone you trust take the tour for you.
  3. Never give money before an agreement is signed by both parties. You should have all paperwork in hand before you send money to the seller. If you’re asked to give a large sum of money prior to the paperwork being finished, then it’s probably a scam.

    First month rent, security deposit, optional fee, all of those are things you’ll be asked to pay but never pay them before the contract is signed and can be used as a legal document.

    Never wire or give money to someone you’ve never met. If you’re uncomfortable with the situation, be sure to advocate for yourself, or have a trusted friend or partner be there with you.

  4. Don’t sign an incomplete lease. If there is missing or incomplete information on the agreement, do not sign it. Adding things after you sign the lease can open you up to a lot of legal issues including the additions of fees and restrictions you never agreed to. 

If you think you may be the victim of a scam or feel like you are being scammed, contact the local authorities and make a report. Be sure to also contact the website where you found the listing to let them know and you can also file a report with the Federal Trade Commision (FTC) to report the scam. 

Are there benefits to rent-to-own vs. buying a home?

There are many benefits to rent-to-own vs buying a home! 

  1. Time to improve your credit score. While you’re living in the home, you’ll be able to spend time improving your credit score by paying off debts, making on-time payments, and paying off larger purchases you may have made for the house.
  2. Time to save money.
    While you’re in the home, you have the ability to increase your savings by creating and maintaining a budget. While you live in the home and part of the rent goes towards paying part of the mortgage, you can spend time saving for the house payment at the end of the lease agreement.
  3. Live in the house before you buy it.
    When you rent-to-own, you’ll be able to live in the home before you own it. This means you have the chance to learn about it’s in and outs, about the neighborhood, and about what it takes to own and maintain the home.
  4. Have the ability to walk away.
    If you decide not to buy the house at the end of the lease agreement, then you have the ability to walk away from the deal. Just make sure your contract allows for that or you’ll be legally obligated to purchase the house whether you want it or not.

Knowing How Rent-to-Own Homes Work is Critical to Success

Knowing how the rent-to-own home process works is the best way to ensure you’ll get the best deal possible. Whether you’re a first time buyer, or rebuilding your credit, rent-to-own is a great way to upgrade your space while still allowing you to save money, increase your credit score, and live in the home before you purchase it.