Buyers are having an increasing amount of trouble finding affordable homes in today’s housing market. Urban housing is often expensive to purchase and to maintain.
The high demand for housing near cities means buyers must have large reliable incomes to afford their own property. Saving for the initial home purchase is not always enough when long-term needs are factored into the equation. Due to a lack of funds, some potential home buyers opt to rent instead.
Home or apartment rental is often considered a waste of money since renters pay landlords without receiving anything tangible or long-lasting in return. A third solution many buyers take advantage of is renting a property on a rent-to-own basis.
Rent-to-own agreements allow buyers the financial security of low payments. They provide the sense of security that comes from buyers knowing home ownership is on the horizon as well. Below is more information about how rent-to-own agreements are formed and what their benefits are compared to other housing options.
How does rent-to-own work?
A rent-to-own agreement allows the renter to live in a space while paying to purchase the property in installments over a designated period. Rent-to-own agreements are not all the same, but most of them have common components such as the following:
- The total cost to purchase the home is usually decided when the initial agreement is signed.
- The homeowner and the renter determine the cost of monthly rent.
- A set amount of rent is deducted each month from the total cost of the home.
When the rental agreement runs its course, the property changes hands if the total price is met. If it is not yet met, then the tenant has the option to pay the remaining balance to purchase the home.
Learn About Determining the Purchase Price
Determining the purchase price of a rent-to-own home is difficult due to the extended time period involved. The value of the home could decrease, increase or stay roughly the same throughout that process. Therefore, there is no way to clearly predict the total value at the time of rental agreement expiration.
Establishing the purchase price is up to the property owner. The seller may set the sale price when the contract is initially signed. Doing so has potentially positive and negative consequences. For example, the buyer:
- Is secure in knowing the total amount needed to purchase the property upfront.
- May get a bargain by paying less than the property is worth by the end of the rental period if market values increase.
- May pay more than the property is worth if the housing market values in the area decrease.
Alternatively, a seller may choose to set the full sale price at the end of the rental contract to make the most of market conditions. He or she may want to do so if those conditions are expected to improve during the period when the rent-to-own contract is in place.
In such a case, the buyer still pays a certain amount of money each month toward the purchase. If the seller determines the home is worth more at the end of the rental period, then the buyer must pay the difference to acquire the property.
Learn About the Advantages and Disadvantages of Rent-to-Own Properties
Buyers considering the idea of entering into rent-to-own contracts must consider their advantages and disadvantages. Renting a property with a rent-to-own option allows a buyer to get into a home early but may limit his or her choices later.
The rent-to-own process eliminates the need for the buyer to apply for a loan to purchase a home. This is helpful if the buyer wants a home but has a poor credit score or lacks the funds to purchase a home right away.
Additionally, the buyer uses the comparatively low rent and extra time to save money, making it possible to purchase the home faster or save up for future expenses. In some cases, rent-to-own agreements may require the intended buyer to obtain financing within three to five years.
One disadvantage of a rent-to-own agreement is it is only helpful for a buyer who is sure where he or she wishes to live. Renting to eventually own a property does not offer the flexibility to move that a standard rental contract offers.
By means of example, a buyer who is stationed in the military, expecting an out-of-state promotion or otherwise unsure of his or her long-term goals may not benefit from a rent-to-own contract.
The fine print of a rent-to-own contract puts a buyer at an unexpected disadvantage in some circumstances. It is important to read the rent-to-own agreement carefully before signing. The agreement may require the buyer to eventually purchase the home.
Alternatively, the seller may allow the buyer to pay what is called an “option fee.” The option fee allows the buyer to have the option of buying the home instead of the obligation to do so at the end of the rental agreement. If the buyer chooses not to purchase the home, then the option fee is often non-refundable.
How to Get Loan Help for Rent-to-Own Homes
- FHA loan information
- Details about the Housing Voucher Program
- Facts about home loan assistance for veterans
- Lists of programs for rural residents
How to Find Rent-to-Own Properties
A potential buyer can locate a rent-to-own property in one of several ways. If the buyer is already renting a home, then asking the landlord for a renegotiation of the rental agreement is one option.
When the landlord-tenant relationship is good, such negotiation is often possible. The landlord may intend to eventually sell the home anyway and prefer to sell it to an already trusted tenant.
A potential buyer can browse housing listings for any properties for sale in the preferred area. Online housing listings specifically for rent-to-own properties are excellent resources. The buyer may have to pay to view those online listings.
It is possible to browse listings for houses for sale that do not yet have rent-to-own options. In these instances, the buyer contacts those sellers to see if they are interested in allowing rent-to-own options.
In an area where homes are not selling quickly, owners may be more receptive to the buyer’s request. Receiving some money toward the eventual sale of their homes may seem better than keeping them on the market indefinitely. Owners are less likely to allow rent-to-own options in an area where houses are currently selling easily.