A rent-to-own home is a property you rent with the option to buy at the end of a lease. People often consider rent-to-own options in three scenarios: First, if they are not ready to make a down payment. Second, if they are not sure whether they want to rent or buy. Third, if they want to test a property before committing to ownership. Let’s take a deeper dive into how to find rent-to-own homes, what this designation really means and if it seems like a good choice for you.
What is a rent-to-own home?
A rent-to-own home uses a rental agreement with either a lease-option or a lease-purchase at the end of the lease term. What’s the difference? A lease-option contract gives you the option to buy, while a lease-purchase means you’re contractually bound to buy the home at the end of the rental period.
How does a rent-to-own home work?
As mentioned, there are two types of rent-to-own home contracts:
- The lease-option agreement
- The lease-purchase agreement
The lease structure you’ll typically see for rent-to-own homes is based on a standard rental agreement. This is a legal document containing important information like the length of the lease, your responsibilities and rights, and any other specificities of the property. There will be a monthly payment for rent that, if you have a rent-to-own contract, may partially go toward the down payment should you buy the home at the end of your lease. That specification may be listed in the lease agreement.
If you are given the opportunity to purchase the home after your lease, it will be outlined in the lease’s option clause.
A lease-option agreement is distinct from the standard lease agreement. It is this option that differentiates a rental from a rent-to-own contract, by giving the tenant the opportunity to purchase the home at the end of their lease. The option clause includes information pertinent to the home purchase, such as the home’s selling price and how much time the lessee is given to decide if they’ll make the purchase. In some cases, the purchase price is negotiated before the rental contract begins. If the lessee decides not to move forward with the purchase, there are often nonrefundable, upfront fees contained in the rent-to-own contract.
If the property owner requires you to buy at the end of your lease, your rental agreement will instead come with a lease-purchase agreement, and your rent payments may go toward the purchase price. If you decide not to buy the home at the end of your lease, you may risk losing your deposit, down payment, and any equity you’ve built through rent payments. Depending on the contract, the seller may be entitled to take legal action as well.
Rent payments and purchase price
Some rent-to-own contracts allocate a portion of monthly rent payments toward the home purchase. This is known as a “rent credit.” Rent credit means the lessee is building home equity with each monthly payment. Sellers may raise the rent in exchange for allowing rent credit, meaning your rent may be higher than comparable properties in the going market.
How to find a rent-to-own home
There are a few ways to find a rent-to-own home:
- Use a rent-to-own portal, which specifically helps people find listings for rent-to-own properties. Access to these portals typically costs a few dollars a month.
- You may be asking yourself, “Can a realtor help me find rent-to-own homes?” Yes, they can. Talk to a real estate professional well-versed in the rent-to-own market. They can help you find a property and decode rent-to-own contracts. If you’re interested in a specific property, real estate agents may be able to help you negotiate a rent-to-own contract with a seller, even if they have not considered this possibility.
- Contact brokerages. Some specialized brokerage companies have specific rent-to-own programs that connect interested parties with rental property owners willing to negotiate a right to buy.
A potential pro of a rent-to-own home is that you may be able to lock in a specific price on the home before buying, which in turn may help when it’s time to finally buy. Another perk is that you typically won’t have to worry about moving costs since you’ll already be living in the home you’re now financing.
A potential con to keep in mind when planning to buy a rent-to-own home is that you may be legally obligated to buy the property at the end of the lease agreement, no matter what state your finances are in. If you’re unable to purchase the home, you may lose out on money in the form of your past rent payments and any other fees in the contract. Additionally, if you miss any payments before owning, it may void the agreement overall.
Furthermore, if you intend to buy the home at the end of your contract but don’t end up qualifying for a mortgage, you’ll likely lose your rights to the property. In the absence of proper financing for the purchase, the homeowner may move forward by selling or renting out the home to another party.
Due to the complicated nature of a rent-to-own contract, it’s recommended to have your contract reviewed by a real estate expert or attorney to ensure the terms are in your best interest.
Rent-to-own homes give people the option to buy at the end of their lease. They can be helpful for people looking to buy but who aren’t prepared to put down a lump sum payment yet, or for people who are interested in owning a property without an immediate commitment. The process for how to find rent-to-own homes is relatively straightforward. You may find rent-to-own options through online portals, by using a real estate agent or with a brokerage company.