There are a lot of ways for you to buy a house: you can pay cash, take out a mortgage or even split the difference between renting and buying by entering into a rent-to-own agreement.
Most people are familiar with the first two options, but not many are aware of renting to own, how it works or what it entails.
Simply put, a rent-to-own agreement is when you pay rent on a property and a portion of your rent goes toward purchasing that property down the line. Because these agreements are not extremely common, there are a lot of particularities you should understand before you enter into one.
Read on to learn more about renting to own, how the process works, what benefits you should expect and what challenges to look out for.
What Is Rent to Own?
Rent-to-own properties are houses where you can live, pay rent every month and have the option to buy it (or not, depending on the details of your agreement) sometime down the line.
The great thing about renting to own is that for every month’s rent, a certain percentage of what you pay goes into your house down payment — if you decide to buy it.
Of course, while rent-to-own programs sound great, the biggest issue it has comes from the premium payment. Before moving in, you may be required to pay somewhere between 2% to 7% of the house’s market value.
You do that to “freeze” the house’s price, so to speak. Then, if you end up deciding to buy the property when the time is due, you can do it at the same price both parties agreed on at the beginning.
Keep in mind, however, the rent-to-own agreements are nontraditional, which means that terms vary depending on who is renting the home. Therefore, you may be able to get terms that are more favorable to you than the ones mentioned here.
How Does Renting to Own Work?
In general, there is no one-size-fits-all when it comes to rent-to-own contracts. However, these agreements usually have six important parts:
- Purchase price: How much the house is worth and what will the full price be if the renter decides to buy the house before the time limit.
- Premium payment: A non-refundable fee, often between 2 and 7% of the house value, that’s paid to lock the purchase price throughout the duration of the contract.
- Rent (and rent credit): The rent is the monthly fee the renter will pay; the rent credit is a percentage of the rent that is added to a down payment if the renter decides to buy. Rent credit is non-refundable.
- Time limit: How long will the contract last. The renter can choose to buy the property within that time frame.
- Renewal stipulation: Optional clause that stipulates if the contract can be extended once the time limit is up.
- Maintenance clause: This determines when the renter pays for repairs and when the landlord does, depending on expenses.
In a rent-to-own agreement, a renter (and possible buyer) agrees with a landlord (and possible seller) to pay for a premium to lock the purchase price of the house during a certain period of time.
Every time the renter pays rent, a percentage of it goes toward a possible down payment of the house. The renter has a time limit to decide whether to buy the house or not. And, when the time limit is up, it can be extended if there’s a renewal stipulated.
Are Rent-To-Own Agreements Worth It?
When it comes to big real estate decisions, there is rarely one correct answer that applies to everyone. Therefore, whether or not entering into a rent-to-own agreement would be worth it for you depends on several factors, including your financial situation.
Rent-to-own programs are great if you have a high level of certainty regarding your future and if you have good reason to trust your landlord. For example, if you expect to get a big promotion in the next couple of years, renting to own may be a good way to secure your future house at a premium price.
If you’re hoping but uncertain that you will be more financially stable throughout the rent-to-own time limit, however, then entering into this type of agreement may not be a good idea. You’d be placing a huge — possibly non-refundable — payment at first and pay an above-average rent for a house. If you can’t buy the house when the time limit is up, you’ll lose a lot of money.
How to Find Rent-To-Own Housing
Since rent-to-own contracts are relatively rare, there are several traditional and nontraditional ways of finding these opportunities.
1. Ask a Local Real Estate Agent
Talking to a real estate agent is your safest bet when it comes to finding rent-to-own homes near you. Not only do they know about most listings in your city, but they will also help you get the best contract possible.
Plus, depending on where you live, you may not be responsible for paying the real estate agent’s fee, since many cities and states require landlords/sellers to pay realtor closing costs.
2. Search Online for Rent-To-Own Properties
There are a lot of sites that have plenty of “rent to own houses near me” ads. All you have to do is find them! A quick Google search will provide you with plenty of them. Read online reviews before you decide to do business with them, just in case.
3. Contact Sellers and Landlords Directly
One non-traditional way to find a rent-to-own property is to reach out to sellers and landlords you already know who might be interested in entering into this type of agreement with you.
Sometimes, sellers who have listed a house for a long time and are having trouble selling it will agree to enter a rent-to-own contract. Landlords can also agree to enter a rent-to-own agreement if they’re already thinking about selling but are reluctant to give up a steady rental income in the near future.
Tip: Avoid Rent-To-Own Foreclosure Homes
Sometimes, you’ll find ads about foreclosed homes or homes that are in pre-foreclosure whose owners are interested in renting to own. This is, more likely than not, a scam. If a house is foreclosed, nobody can buy it other than the bank. Plus, even if you could, there’s a lot of legal issues that would make it more trouble than it’s worth.