A rent-to-own home is one in which you agree to rent the house for an agreed upon time before you purchase it outright.
The time you rent depends entirely on the contracts offered by the current property owner.
For some, this option may be a good way to become a homeowner. However, rent-to-own doesn’t come without its drawbacks.
We’ll explain the process so you can make an informed decision.
How rent-to-own home contracts work
There are two types of contracts for rent-to-own homes.
The first is a lease option agreement. With a lease option agreement you have the option to purchase the home after your lease is up.
The other type of rent-to-own home contract is a lease purchase agreement. If you go with a lease purchase agreement, you must buy the home per the contract.
Further, there’s also a one-time fee you must pay upfront called the option fee, option money, or option consideration.
This money acts as a sort of deposit providing you the option to buy the house at the agreed upon date.
The option fee is usually negotiable, but normally nonrefundable, and is normally 1% to 5% of the purchase price.
That purchase price, when it was determined, and how it was determined should be specified in your rent-to-own agreement.
You should make certain of this because sometimes the contract states the purchase price is decided upon after the lease expires. However, in some cases, it is decided upon when the contract is signed.
The latter is usually the best option in markets where home prices are trending upwards.
How much of my rent goes towards purchasing the home?
The amount you pay in rent can technically be negotiated, but you will normally agree to pay more than market value rent.
In most cases, that additional amount is 25% to 30% of your monthly payment and only part of it will go towards the purchase of the home.
So, technically, you could just rent anywhere and save up money on your own to buy a house.
Which might be the best option considering you’ll still need to come up with a down payment when your rent-to-own home’s lease is up.
That’s because the additional rent doesn’t go towards your down payment. It goes towards the purchase price.
Who is on the hook for repairs?
Before you sign your rent-to-own agreement, you should make sure who is responsible for repairs or maintenance.
You could be the one responsible for all repairs, maintenance, HOA fees, and property taxes.
While that may sound fair to you, if for any reason you decide to not purchase the home you forfeit that money invested.
What happens when a rent-to-own home contract ends?
This will depend on the type of lease you signed.
Again, if you signed a lease purchase agreement you might be legally obligated to buy the house.
If you went with the lease option agreement you can decide whether or not you would like to buy the home.
However, if you decide to not buy the house you will likely forfeit all the money you have paid. That includes the option and all additional money paid above market value that was supposed to go towards the home.
Is it better to buy a house outright than rent-to-own?
If you have the credit and the downpayment money it’s oftentimes a better deal to outright purchase a home. You end up spending more money doing a rent-to-own arrangement.
Unless your credit is in disrepair or you otherwise can’t qualify for a loan, it’s better to just buy a home.
