Rent-to-own programs are a good alternative to conventional mortgages and home loans. While these arrangements offer a variety of benefits to buyers and sellers, they also pose significant risks to both parties. That’s because rent-to-own contracts give place to different types of dangers and pitfalls.
For some, it’s an excellent chance to start investing in a house purchase. The same decision can be damaging in terms of finance for others, though. That is why it is critical to understand the disadvantages and advantages of rent-to-own purchases.
It can seem appealing to those who can’t qualify for a mortgage and cover larger down payments on a house. By signing a lease option agreement, they can move into their new house without saving for years to get their finances in order. Does it seem like a good idea? Keep reading to find out.
What Are the Cons of Rent to Own Homes?
Let’s get started with the disadvantages of rent to own. Some people find it not a good option either. Why rent to own is bad?
You could lose the extra money
Keep in mind that rent credits and premium payments aren’t refundable. So if something goes wrong and you terminate the contract, you will end up backing out of the real estate deal and losing money (rent credit plus the option fee) you have invested. This means you will lose your initial investment if you can’t qualify for a loan and purchase the house.
The house value may go down over your rental period
You need to determine the purchase price with the seller when signing a rent-to-own contract. Regardless of the future house value, you’ll be required to pay this exact price. House prices usually go up.
However, the prices may fall when the real estate market crash. As a result, you may you will have to pay more than the actual house value once the option to purchase becomes available.
The tenants do not have full control over the property since they do not own it yet. For example, they can’t make vital home maintenance decisions on their own.
The landlords can stop paying property taxes and mortgage or lose a judgment, which leads to property liens. If your landlord gets into debt, the home may go into foreclosure. You will lose the chance to buy the home and have nowhere to live in the worst-case scenario.
Related: How to spot rent to own scam?
Paying for repairs
Renters are obligated to take on home repairs while they are renting. This is a good choice if they’ve got plenty of room in their budget to keep investing in their future home. Investing in a house by repairing is not always a smart decision either.
By the way, not everyone can afford to buy the property in the end. Even if the home doesn’t belong to the renter eventually, he or she will still have to pay for repairs.
Late payments can be a big deal
Late payments may hurt sometimes. They can entitle the seller to get the agreement terminated. As stated above, renters who do not pay their rent on time may risk losing their extra payments. Even only one late rent payment can completely derail your deal.
Pros of Rent to Own: Is Rent to Own a Good Idea?
Now that you know the potential problems and risks, it is time to examine the advantages of rent to own and see when it seems like a good idea.
Immediate move-in without an arranged mortgage
The best thing about renting to own is that you can move in right away without having a home mortgage in place. This is especially beneficial to those who have some debts and can’t get approved for a home loan right away.
With a rent-to-own agreement, they can put it off for some time – usually up to three years. At the outset, this arrangement may look like a traditional lease purchase. Rent to own, however, gives exclusive rights to renters to buy the house at some point before their tenancy expires. That makes a big difference.
Eliminate purchaser’s remorse
Rent-to-own is a good option for buyers who are unsure about split-level layouts or homeownership. Maybe you are not sure you will be able to keep up with property and house maintenance. If so, renting to own is a safe bet.
Down payment will build up as time goes on
Rent to own is a good idea for buyers who currently don’t have earnest money to buy a house they wish to call their own. They can build up their finances gradually while residing in their dream home. This can help them save money toward the home purchase. The determined monthly rent and upfront payment go towards the purchase price.
No real estate competition
Another great thing about renting to own is that you will not have to worry about competition for the house. You’ll be the only person eligible for house purchase once your lease runs out. The seller can’t find other buyers and put the property on the open rental estate market unless you do not meet the requirements of your contract.
Related: Rent to own breach of contract.
Purchasing a Home vs Renting to Own: Why Buy the Home With Rent to Own?
If you plan to purchase the home, you may wonder: Is it better to buy or rent to own? Here are some reasons to choose a rent-to-own program over purchasing a home.
- Buy with a poor credit score: Buyers can start buying a home while building their credit scores to get approved for a home loan.
- Build purchasing equity: Your payments will accumulate over time so that you can apply your payments towards the home purchase.
- Lock in a home purchase price: As a potential buyer, you will be able to back out if housing prices start to drop.
- Test drive: Rent to own allows tenants to discover their new neighborhood and home problems before they commit to buying the house.
Related: Check this guide on how to rent to own works!
The Bottom Line
Don’t rush into entering into any agreement. The same is true for rent-to-own agreements. Consider weighing all the cons and pros before you commit to a home that involves a rent-to-own contract.
It’s best to hire a real estate attorney and/or a real estate agent to review your contract and identify all the pitfalls. That will help you evaluate contract risks and make an informed decision.