Rent-To-Own Homes: What They Are And How They Work

what is rent to own

A traditional mortgage isn’t always an option for everyone.  If you need time to build up your credit score, have more time to save for a down payment, or you know exactly where you want to live, a rent-to-own home may be an option for you.  But what are they and how do they work?

What is a Rent-to-Own Home?

A rent-to-own home, also known as a lease-to-own home, is a house that you rent for a specific amount of time that comes with the option to purchase before your lease expires.  But depending on the type of agreement you have, you may or may not be required to purchase the home.  That is why it is important to know which type of rent-to-own agreement you’re committing to and why we created this post.

Below you’ll learn about rent-to-own homes from how the agreements work, to the advantage of taking this step as an investment or ownership strategy, and some helpful hints so that you can decide if a lease-to-own agreement is right for you.

How do rent-to-own homes work?

A rent-to-own home works by following this process:

  1. The rent-to-own agreement you sign with the seller will specify both when and how the purchase price will be decided.
  2. You will then agree to pay a certain amount of rent each month. These rent payments are typically higher than other rent prices in the area, because a percentage of each payment is set aside as a down payment for the home.
    1. The seller may ask you to cover costs such as repairs, maintenance, HOA fees and even property taxes while you are renting.
  3. Once a contract is in place, you will then pay the seller a one-time, nonrefundable fee that’s typically a percentage of the home’s purchase price.
  4. You and the seller will also need to agree to a specific lease term.
    1. There are typically two different types of rent-to-own contracts:
      1. lease option agreement
      2. lease purchase agreement.
  5. Once your lease is up, you’ll need to secure financing if you plan to purchase the house, if your agreement requires a purchase at the end of the lease.
  6. Now you’ll go to the closing table following a standard house purchasing process, but in this case the money your landlord set aside towards ownership is returned to you and put towards the price of your new home.

What is the difference between a lease-option contract and a lease-purchase contract?

The main difference between a lease-option and a lease-purchase contract is that a lease-option contract gives you the right to buy the home when your lease expires. A lease-purchase contract requires you to buy the home.

Are there fees with rent-to-own homes?

Yes, there are fees associated with this type of home purchase.  While there is no standard rate, the fee is often between 1% and 5% of the purchase price of the house and is nonrefundable.

What are the advantages of investing in a rent-to-own home?

The advantages of investing in a rent-to-own home include:

  • Your rent is an investment toward your home with faster equity.
  • The sale isn’t dependent on your credit score.
  • You can move into the home more quickly since you already live there and don’t need to wait for a current resident to move out.
  • There are no property taxes while you are renting as your landlord owns the property and pays them.

Are there risks with rent-to-own homes?

Yes, there are risks with buying a rent-to-own home including:

  • The interest rates will be higher when you purchase.
  • The home can lose value.
  • You are obligated to buy the house regardless if you can afford it if you have a lease-purchase contract.
  • You can lose your option to buy the property if you are late on rent payments or if you fail to notify the seller of your intent to buy.

And now you know what a rent-to-own property contract is, how it works, and how to make a decision if a lease-to-own home is right for you.

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