Renting-to-own a home is not as simple as rent money going toward the purchase cost of the home. Instead, this arrangement typically involves only a portion of the rent money going toward a future option to buy, and often that amount is above and beyond what rent would have cost otherwise. It's an unconventional way to buy or sell a home that has both potential drawbacks and benefits for sellers and buyers alike.
Rent-to-Own for Sellers
Selling a home in a rent-to-own scenario should always involve the participation of a legal professional to ensure the agreement is legally sound and beneficial to all involved parties. Though these agreements typically benefit the seller, they can be quite complicated and the seller should take all necessary steps to protect their own interests.
Pros for Sellers
In a buyers' market where homes for sale are abundant and prices are low as a result, sellers can use a rent-to-own option to attract buyers who may not qualify for a mortgage through a traditional lender. Sellers can also "call all the shots" as to how the rent-to-own agreement will work and can insist on stipulations that are to their benefit such as a missed payment resulting in forfeiture of the accumulated deposit. Rent-to-own homes aren't typically prevalent, so the seller is at an advantage by offering a sought-after product on the homes market.
Cons for Sellers
The benefits of selling a home rent-to-own can quickly become drawbacks, depending upon the situation. For example, attracting buyers who can't qualify for a mortgage means attracting buyers who may not have the financial wherewithal to make payments consistently; this means the seller has to play the role of landlord and collection agent. The home remains titled to the seller until the option to buy is complete, meaning the mortgage obligation remains the responsibility of the seller, possibly affecting the seller's ability to obtain additional credit. The seller is also responsible for setting the terms of the rent-to-own agreement and ensuring compliance from the buyer. This can feel like an arduous task to sellers who would much rather just sell the house and be done with it.
Some sellers simply can't qualify for a mortgage because of credit issues, inconsistent employment, or lack of a down payment. For these buyers, a rent-to-own home can be a solution for finding a pathway to home ownership.
Pros for Buyers
The biggest benefit for buyers is the opportunity to work toward buying a house despite credit problems or insufficient income. The rent-to-own agreement gives buyers time to build up a down payment or improve their credit score to prepare for eventual home ownership. Home ownership isn't instantaneous with a rent-to-own option but if all payments are made and all conditions are met, the buyers can exercise their option to buy and become homeowners through this non-traditional path. It's a good way to claim a home before actually having the ability to secure financing.
Cons for Buyers
Buyers who can obtain a mortgage through a traditional lender should seek out financing from the lender instead of obtaining a rent-to-own agreement. Far too many rent-to-own scams exist where the home isn't suitable for occupancy, the "seller" doesn't actually own the home outright, or there is a backlog of unpaid property taxes. Buyers can wind up paying more money monthly with this type of agreement than they would with rent or a mortgage payment, and the money they pay the seller doesn't accrue interest. Sellers may also stipulate in the contracts that the buyers are responsible for all maintenance during the contract period, which can result in costly, unexpected expenses.
In most cases with rent-to-own properties, if the buyers decide not to exercise the option to buy at the conclusion of the contract period, they must walk away empty-handed as the seller keeps all the funds already paid toward the home.
An Option if Needed
A rent-to-own home agreement is usually to the benefit of the seller, but it can be a gateway to homeownership for buyers who wouldn't otherwise have the opportunity to buy. Anyone entering into one of these agreements should review contract details carefully to understand completely the terms and conditions of the agreement.