What Is Rent-to-Own Housing and Is It a Good Idea?

by Emily Guy Birken · 8 comments

You see these signs all the time, especially at large intersections: “Rent To Own! No Financing Necessary!” While I’m familiar with rent-to-own (or lease to own, as some call it) when it comes to appliance and even car purchases, I’ve always wondered exactly how this works with a house. I did some digging recently, and here’s what I found.

The Basics


Renting to own a home is somewhat similar to a car lease. The seller has given his tenant the right to buy the house at some point in the future, usually one to three years out, for a price that is agreed upon today. Generally, the tenant will pay a fee, called option money, that will keep open the option of buying. In addition, it is common for the tenant to pay about 20% above the typical rent for the house. So if a home were to normally rent for $1000/month, a rent-to-own tenant would pay $1200. A portion of that rent will be credited to the tenant for an eventual down payment.

This can be a win-win for both seller and tenant. Many sellers offer this option if they are having trouble unloading the house and can no longer afford the mortgage payment. Often, you will find that sellers offering rent-to-own as an option are individuals who have already moved into a new home and are trying to avoid paying double mortgages for the long term. Tenants who rent-to-own are often individuals who would have trouble buying a house through the traditional route because of poor credit, low income, or lack of a down payment. Rent-to-own gives them an opportunity for home ownership while living in the house they will eventually purchase and it also gives them a chance to discover flaws in the house before committing to purchasing it.

The Fine Print

Unfortunately, rent-to-own is not always a good deal. If the tenant decides not to purchase the house at the end of the rental term, none of the extra money that he paid to the seller comes back to him. So he would have paid above market value for a rental and have no extra cash to show for it. Furthermore, unlike in traditional rental scenarios, the tenant is often responsible for repairs and maintenance during the lease term, and any money or sweat equity you put into the rent-to-own property will not be reimbursed.

Finally, some rent-to-own agreements are worded so that you are contractually obligated to purchase the home at the end of the lease. It’s extremely important that you know exactly what you are signing if you enter into one of these agreements so that you are not stuck with a contract you cannot fulfill.

The Pitfalls

It turns out that many tenants who enter into rent-to-own agreements end up unable to buy the house at the end of their lease for the same reason they were unable to buy before: they still don’t have the credit rating, the income, or a large enough down payment. At that point, the seller walks away with a great deal of extra cash toward his mortgage and the tenant ends up with nothing.

If you are interested in a rent-to-own agreement, it would make sense to talk to a bank about financing before you sign any papers with the seller. Ultimately, however, these agreements are not the healthiest financial path to home ownership.

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{ 8 comments… read them below or add one }

20 and Engaged September 23, 2011 at 4:28 pm

I’ve seen this too. If you are renting, you’re usually not close enough either credit wise or with a down payment. The leasing term is up and you’re in the same predicament. Sounds good initially but ends up being tough to accomplish.

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MoneyPerk September 25, 2011 at 8:08 pm

If someone is looking to own a home, I definitely would not recommend rent-to-own properties. I think they are good for those who want to own a home in the quickest of time, but this piece makes a good point, the fine print says it all.

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Patrick R. Carlson September 27, 2011 at 8:42 am

The post author is correct that rent to own can be a great deal for both buyer and seller on the economic front. I would just like to caution again that both sides of the deal need to be particularly careful in reading and understanding the contracts they are signing. You never want a surprise down the road.

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John September 29, 2011 at 10:25 am

If they want you to do a rent to own. get a contract or ask them to just sell it to you on a wrap and then you record the deed/contract. Even if the paperwork says “this document cant be recorded” (it’s bs) Recording anything does not invalidate it. But if you buy the property on a wrap around mortgage you need to make the payments directly to the lender. NOT THE PERSON YOU ARE BUYING IT FROM

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MoneyPig September 29, 2011 at 6:32 pm

The only reason why you would do rent-to-own is because you cannot get a traditional mortgage. If that is the case then I advocate just renting. Because your credit is the main reason why you cannot get a mortgage. I suggest fixing that before even thinking about owning a house.

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Marbella October 3, 2011 at 3:14 am

Hi Emily,
We have “Option to buy contract” over the last 5 years here in Spain and I don’t know anybody that have been a success with it.
The owner; don’t want to sell in the end for the price is in the contract; have get a better offer form someone, ect.
The buyer; don’t want to pay the price – they want cheaper, they want the owner fix many thing before they buy, ect.

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dario October 28, 2011 at 11:56 am

Hello everyone,

This post is correct in that a rent to own can be a great deal for both the buyer and seller however I would just like to caution anyone considering a lease option to be particularly careful in reading the entire agreement and understanding the contracts they are signing. I would strongly recommend you have your own attorney review the agreement so it can be properly explained before you turn over your hard earned money to anyone. You will want to protect yourself from any surprises down the road.
I’ve acquired many properties using rent to own and there are two reasons why anyone would do rent to own. One is you cannot get a traditional mortgage because of poor credit or lack of money for the down payment or Two because you want to control real estate with very little money down. It’s my experience that most fall in the no money or poor credit so if that is the case then I suggest just renting for just a bit longer. While you’re renting you should consider fixing your credit and setting aside a few hundred dollars every month before even thinking about owning a house.
Now if you really want to own a house using a rent to own will be the easiest way. Look for an individual or a company that is reputable and selling homes through a rent to own program is their business. You want to make sure you are dealing with professionals. Have your attorney review the agreement and have him to record the agreement on title. You should also consider buying a home using a land contract or using a wraparound mortgage. Always remember that however you acquire the home if you are making payment to the seller/home owner he or she may not be making payment to his mortgage and you could find yourself with a notice on your door telling you to more out because the owner was foreclosed. If this happens you will lose everything so make sure you discuss all the pros and cons with your attorney.

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