The concept of rent-to-own allows the buyer the option of purchasing the home in the future for a predetermined price. Unlike traditional home sales where the transaction is concluded immediately, arent-to-own agreement arranges for the buyer to pay an “option fee” which allows them to buy the home later, typically with some of the rent payments going toward the sale.
There are pros and cons with this kind of sale for the homebuyer and before entering into this kind of contract, it’s important to understand them.
- Time – The most common reason buyers will opt for a rent-to-own purchase is to give them time to either improve their credit or save for a down payment/closing costs. By deferring the traditional lending, they are securing the option of buying the home for a set period of time.
- Test Drive – Another common advantage is the ability to live in the home and community before committing to a purchase.
- Build Equity – While typically not all the rent will go toward the purchase price, most rent-to-own contracts designate some of the rent for the eventual purchase.
- Falling Prices – A rent-to-own contract locks in the purchase price and if home values fall, the buyer might opt not to buy, thus forfeiting their portion of the equity they were building.
- Scams – The largest risk is that the seller is unable to deliver the home at the agreed-upon time. These contracts are appealing to those who can not buy with traditional funding and are insecure financially.
Rent-to-own real estate transactions can be a great way to enter the housing market if traditional funding is unavailable. Before jumping in, consider all the options and make sure you recognize the pros and cons of this kind of purchase.