Homeownership in the United States reached 64% in the third quarter of 2018.
Whether you have visions of buying the house of your dreams or you’re in the process of hunting down your next property, deciding where you live is one of the most important decisions you’ll make in your entire life.
While most people consider renting vs. buying, very few people understand the principles behind rent to own. However, there are numerous advantage and disadvantages to consider.
Let’s get into what you need to know!
What Does Rent To Own Mean?
In its simplest form, rent to own refers to renting something over time with the option to purchase the home at some point in the future.
In a traditional real estate transaction, the buyer and seller complete the purchase at the closing time. The new buyer takes over the house and acquires a mortgage. The previous owner moves on to their next property.
The rent to own agreement works differently. The buyer and seller usually agree to the possibility of a sale occurring at some point in the future. Ultimately, the renter will decide if the transaction happens.
However, in the meantime, the renter makes regular payments (similar to a mortgage) to the seller.
Advantages of Renting To Own
This opportunity can be very attractive to potential homeowners. Let’s get into some of the best advantages.
One of the downsides to renting long-term is that you don’t build equity. In other words, when you rent, your money doesn’t go toward something tangible. Instead, it goes to the landlord or property management company in exchange for them providing you with a place to live.
However, with renting to own, the payments accumulate to go towards the home’s purchase. This provides you with the chance to build equity, which can build you financial leverage.
Secure a Purchase Price
When it comes to real estate, even though the market ebbs and flows, rates always tend to go up. If you can secure an agreement at today’s price, you’ll likely save money if and when the purchase occurs several years down the road.
You’ll, of course, have the opportunity to back out of the sale if you so choose. But, you’ll have that financial peace of mind knowing you locked in a designated price.
Buy with Bad Credit
Don’t have a stellar credit score? You may face some severe hardships if you want to qualify for a traditional home loan.
When you opt for the rent to own option, you can reestablish and rebuild your credit score. Once it’s time to purchase the home, you’ll be able to have your score at an optimal number.
Test Drive The Home
When you see a new t-shirt that you love, you typically try it on first. When you’re shopping for a car, you usually take it for a quick test drive. With a rent to own, you apply that same philosophy to your house.
In other words, you can live in the home before committing to the permanent sale. This will help you detect any serious issues like annoying neighbors, rodent problems, terrible traffic, etc.
If you have a specific neighborhood or community in mind (that you aren’t yet able to afford), you can still enjoy the luxury of living there without the high price tag.
Disadvantages of Renting To Own
Just as there are many advantages, there are also several disadvantages to consider before taking this leap. We discuss these below.
Potential for Scams
First things first, rent to own scams are widespread. Think about it. It’s a quick and convenient way to acquire profitable sums of money from people in financially vulnerable situations.
Before taking on this option, make sure to read any and all documents you sign thoroughly. A scammer may attempt to hide details in the contract to get you on the hook for dealing with additional payments, repairs, or maintenance costs.
Wasting or Forfeiting Money
For whatever reason, if you choose not to buy the house, you will lose all the money you paid into it. That means you won’t receive any of the equity applied to purchase the home.
With that in mind, there’s an inherent need to commit to the property. Otherwise, you risk making an unfortunate financial mistake.
Falling Home Prices
Although we mentioned earlier that real estate always tends to rise, downturns and recessions do happen. For example, the infamous 2008 financial crisis created the most significant real estate disruption in the U.S. housing market since the Great Depression.
Nobody can time the market and nobody can accurately predict how, when, or even why housing prices will rise or fall. If you take the rent to own approach, you risk the home price falling without the opportunity for you to renegotiate for a lower price.
Most people buy a home because they want something that’s totally theirs. They want to choose the decorations or the remodels or the landscaping, and they don’t want to jump through any hoops to do it.
When you rent to own, you don’t own the property yet. That means you don’t have total control over what happens.
For example, your landlord could face his or her own financial difficulties and could stop making the mortgage payments or paying property taxes. You may face foreclosure!
Inevitably, problems can manifest in any home. However, you shouldn’t treat a rent to own home like it’s just a rental property. Doing so would be negligent.
Instead, you need to get a proper inspection and title search before moving in and calling it home. You don’t want to find out about problems after signing all the necessary paperwork.
Additional Details To Consider
Unlike traditional real estate transactions, rent to own homes don’t have the same standard contracts. Therefore, it’s mostly unregulated, and it can look different from house to house.
Get A Home Inspection
As mentioned, a home inspection is a necessity. You should document any necessary repairs, take photos as needed, and make sure that the home price accurately reflects these conditions.
You also need to determine whether there are any liens against the property that could impact your home purchase.
A lease option gives you the front-of-a-line pass to purchase the home you’re renting. It’s usually valid for a term equivalent to the lease term provided in your rental agreement.
But to maintain this status, you may need to pay an option fee that can vary anywhere from 2-8% depending on the owner and the house. This option fee credits towards the home’s purchase, but you will not get it back if you do not buy the home.
You should make sure that you’re signing a lease option – not a lease purchase. While these terms may sound similar, the option gives you a choice to purchase the home, but the purchase requires that you do so.
Finding these types of homes isn’t as simple as searching for a traditional home to purchase. There are some online directories and websites, like iRentToOwn or HousingList, that can help you get started on your search. Some of these sites require a nominal membership fee.
You may want to start by directly visiting your target community and neighborhood and honing in a few houses for sale.
You should consider directly asking the sellers if they’ve considered a rent to own option and you should tell them that you’re interested. This may be enticing if they’ve already moved and/or looking to make additional money.
If you’re currently renting a home that you could foresee yourself living in for the long-term, you can always ask your own landlord if he’s willing to sell the house to you.
Uncertainty or Commitment Issues
If you’re not on the fence about where you want to live, owning a home may not be the right choice for you. Commitment is a necessary part of the process for both traditional and rent to own buyers.
If you don’t have the time or discipline to improve your financial situation, this probably isn’t the best option for you, either. You risk losing out on money by walking away or because you won’t be able to make the payments.
In these cases, it’s almost always better to consider renting and saving up the old-fashioned way.
Rent to own homes have become increasingly popular over recent years. With many people looking to settle down despite having perfect financial portfolios, this is a feasible option for those looking to secure the house of their dreams.