Rent-to-Own Homes: How Does It Work?

Rent-to-Own Homes: What Are They, and Are They Good Idea?

You either own or rent a house. Have you heard of rent to own? When you search for homes to move into, have you come across rent-to-own homes and wondered what is rent to own?

Many would love to buy a home for themselves to avoid moving once in a few years or pay high rents to the landlord, to have an asset, a financial safety net, and the reasons just pile on. There are many reasons why one would want to buy a home rather than just rent it. What can you do if you are financially not in a position to buy that perfect home?

What Are Rent-to-Own Homes?

When you find the perfect house but are not financially ready to buy it, you can make arrangements with the owner. You can get into an agreement to rent to own meaning you will rent the home now to own eventually at a particular date in the future.

The buyer (renter) and the seller (owner) will decide on a rate that will be more than the current going rate. The rate will consider the duration, the inflation, and other factors that affect the cost.

Now, this is the price both agree upon, and the buyer can buy the house at this rate on the date agreed, irrespective of what the house costs then. Whether the house cost goes up more than expected or depreciates due to economic deflation or other reasons, the deal will go through at the agreed cost. This is a calculated risk both buyer and seller take in exchange for the surety of the sale.

The Rent-To-Own Contract In Real Estate

The contract will have the following details:

  • The upfront payment
  • The duration of the contract or the end date by which the buyer can buy the house
  • The monthly rent

If the buyer does not buy the house by making the final payment as promised, the agreement will be canceled. The seller need not pay back the excess amount collected as rent. It will be his compensation for not selling the house to anyone else during the agreement period.

How Does Rent-to-Own Work?

Let’s understand how rent to own works with an example.

Let’s say you find the perfect home for your family – a beautiful big house with just the right number of rooms, amenities, land area, and everything. Now, you are not in a financially sound position to go and buy the house, but you don’t want to let it go either.

Now, you can talk to the owner and get into a rent to own agreement. As per this agreement, the initial payment made towards the house (some landlords take a few months’ worth rent as an advance) can go towards the house’s down payment.

The monthly rent will mostly be higher than the actual going rental rate. The excess amount from this rent will go towards the purchase cost of the house. The agreement will have a final date (let’s assume 1 year) by which you can buy the house.

By this date. A down payment is made; your monthly part payments cover part of the house cost. You can buy the house by paying up the remaining amount when the date arrives. You can pay on your own or take a loan for the same.

  • Cost of the home to own – $1,000,000
  • Initial down payment – $300,000
  • Monthly rent – $50,000
  • 1 year of rent – $600,000
  • Remaining amount – $100,000.

You can pay this on the final date and sign the agreement to become the house’s new owner.

So, this is very similar to taking the house on a lease, but you have a guarantee to become the owner of the property at a predetermined future date.

Is Rent-to-Own a Good Idea?

One of the biggest doubts when you come across some rent to own real estate or beautiful rent to own houses is – is rent to own worth it? Do you have to pay all that extra rent monthly?

Here are some circumstances in which opting for homes rent to own can be a good option for you:

  • Specific Property

Sometimes we just fall in love with a house. We may not be in a position to buy it yet, but we know this is what we want for our family.

You can rent the property and live in it, but how long will the homeowner rent it to you? There is no guarantee there. If this house is listed as rent to own property, you can eventually pay rent to become the owner.

This agreement ensures the house is not sold to anyone else, and you will eventually buy it.

  • Bad Credit

Your credit score matters when you need to take out a loan to buy a house. You can choose to rent to own homes with bad credit and no down payment. You can use this time to build up your credit score. Paying the rent on time will also help improve your credit score. You can take out a loan and pay for the house with a good score.

  • Options

When you take a house on rent with option to buy, you can choose to buy or not when the agreement ends. Meanwhile, you can search for more homes rent to own options. You can buy time and have options on your hand to buy yourself a property when you find the right one.

Consider it like test driving a car. You get to live in that house for a while, experience the locality and amenities, and then decide if you and your family want to live there permanently or move on to a better property.

  • Ratio

Calculate the price-to-rent ratio. It is a ratio that measures the affordability to buy Vs. rent the house. If the ratio is more, you are better off renting the property. On the contrary, buying a house is a better option if the ratio is less. In such a case, finding a house that fits your rent to own requirements can be a wise investment decision.

The ratio will vary from city to city. Also, it would be best if you calculated using numbers from the area you are considering instead of taking the national average. It will give you a better and more accurate picture to make a wise decision.

When Not To Rent To Own

Now that you have a better idea about how does rent to own homes work, here are circumstances under which this may not be the right choice for you:

  • Unsure About Property

If you are unsure about the property, then making the big down payment and paying higher rent may not be wise. When you don’t buy the house as agreed, you will lose all that extra money saved in a bank that would be safe and grow for future investments.

  • Unsure About Landlord

As per rent to own definition, your landlord will still be the owner until you buy the house. You both have agreed to become the owner eventually, but you are still only a tenant. The relationship can flourish only if you are sure about your landlord.

Your landlord has more control over the property and may not honor the commitment. They may not spend on maintaining the house, paying mortgages on time, or make defaults on other payments, which can, in turn, affect the house. In such a case, though your money will be safe, it is an unnecessary ordeal you will have to go through.

  • Unsure About Market

If you are not sure about the market, it is not wise to lock your money in a property. If you are not sure the market value for the property will indeed go up in the future, there is no point in paying a higher rent.

If the market prices fall, it does not reduce your final cost of the house as you have already agreed to pay a particular price. So, if the house’s market value or the real estate depreciates, you will be paying more than the actual worth of the house.

  • Issues May Crop Up

You may fall in love with the locality and the house. You will find the best way rent to own can work for you. If the house has issues you are unaware of and finds out only by living there, it can be tricky. Do you go ahead and buy the property with issues or stop paying and lose all that extra rent you paid towards owning the house?

How To Rent To Own

So, now that you know the advantages and disadvantages of rent to own properties, how do you go about it? How to find rent to own homes that are in good and legitimate conditions? A little carelessness can cost you dearly.

Here are a few tips for finding legitimate rent-to-own programs:

  • Peruse – Check the market well for various rent-to-own options. Ask friends, neighbors, and agents, and then decide. Do not go with a random listing.
  • Check – Check the property and the offer carefully. Check what the seller is offering, the rates, time duration, and the property itself to ensure you invest in a valuable property.
  • Validate – Validate all the claims by the seller. Do not just accept and believe everything the seller or the agent says.
  • Calculate – Calculate the rent to own ratio to determine if you should rent or buy the property.
  • Agreement – Get legal help and frame an airtight agreement to protect your interests and money in multiple scenarios. If there is a problem, you need to get out of the agreement and do so without incurring a loss, only if your agreement is foolproof.

Should You Offer Your House For Rent To Buy

Do you own a house you want to sell? Will renting your own option work for you? Here are a few circumstances when the rent to own option can work for a seller:

  • More Buyers – You will have more takers for the property when you open your house for rent to own.
  • More Money – Since the rent will include the cost of the house, you will get more monthly rent. You have more money inflow to invest in another property or for expenses. Either way, you will earn a higher rental income.
  • Sale Guaranteed – You have a definite buyer for the property. When you have a buyer in hand and know your property will sell eventually, you can start focusing on other investments or look for a new place to buy.
  • Safe Renter – When your renter wants to buy the house, they will take better care of it. They will also make timely payments as they want a good credit score and do not want the deed to fall through. So, you don’t have to worry about collecting rent on time, nor will you have to worry about the house’s condition.

Sometimes, it may not be the best option to put your house on rent to buy. Here are a few circumstances when rent to buy may not work well for a homeowner:

  • Uncertain – There is no certainty about your buyer. Your rent-to-own tenant may opt not to buy the property anytime. If they opt out of buying towards the end of your agreement, you will have to start all over again.
  • Price Fluctuations – Real estate market is always fluctuating. You stand to lose if you do not gauge the market well and agree to a price lower than the appreciation value. If your house value appreciates many times more than what your agreement states, you are potentially losing all the money.
  • Flaws Discovery – When your potential buyer lives in the house, they may discover flaws with the property. They may notice negative things around the area, which can dissuade them from buying the property.

Final Thoughts

Rent to own can be a good option for those who want to buy a home eventually but cannot do so right away. When a person does not have enough funds to buy a house, they can opt for rent to buy and buy the house they are living in. Similarly, a homeowner can also benefit from offering their property as a rent to buy home. When you carefully choose the property, renting to own can be very beneficial.

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