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

by Emily Guy Birken · 25 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.

rent-to-own housingThis 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 homeownership.

Are You a First Time Home Buyers? Then Read On

Buying your first home can seem daunting at first. After all, you are most likely putting down almost all your savings as down payment and also trying to obtain a very large sized loan to boot. I know that being in serious debt can seem frustrating, but homeownership can have its rewards too. The stability, the lack of a landlord, and the peace of mind can all benefit you and your family in the long run. If you are contemplating on such a large purchase, here are some timeless first time home buyer tips to help you get started.

Buy When It Makes Sense

With real estate, timing can make a big difference. Yet for most people, it’s not possible to pick the absolute bottom. Like any product where the price is affected by supply and demand, people who try to wait for the absolute bottom usually end up missing it until months (if not years) after. The better approach is to buy only when you can afford it because you don’t need to worry about the market once you are moved in. If you are very sensitive to the numbers, work out whether it makes more sense to rent instead. It’s straight forward to figure out whether it would cost less to rent a property that you are planning to buy. If this is the case, then you should consider waiting until it makes more sense mathematically to own.

Get Pre-approved for a Loan Before You Start Looking for a House

During the boom years, you can get a loan for any house you possibly want. These days, lending standards are much tougher. For first time home buyers, this is actually good because it will limit you on the houses that you can buy. If you are serious and motivated to find a home, first get pre-approved from a lender. Doing so will give you an exact theoretical maximum amount you can offer on a home, which will help you narrow down your home choice considerably (a very good thing actually as there are too many choices out there).

Consider a Shorter Term Loan

You see 30-year fixed loans as the golden standard in mortgages, but there are actually other, shorter term loan options as well. While the payments are higher, the interest is almost always smaller too. Think carefully about what is affordable to you, but opting for a 30 year, fixed interest rate that’s higher than a 15 year and moving in a few years as most first time home buyers do is throwing money away.

Work Out the Numbers Yourself

Every lender will give you different options. Discount points, loan rates, credits towards closing etc will all factor into which option works best for you. Most people just make a decision on the spot, but it’s much better to take all the options and work out the numbers yourself. There are tons of mortgage calculators available online, so do your homework and choose the option that makes the most sense for your situation.

Figure Out Your Needs and Wants

Once you have an idea of how much house you can (or want to) afford, it’s time to look at the options available. Go to Redfin.com and search for a house that fits your criteria, and make a list of your preferences. Note that the perfect home may not be possible based on your income and down payment this time around, but don’t worry because life will be very boring if you can meet all your hopes and dreams early on in life.

Be Patient

One thing to remember during this whole process is to be patient. From picking a lender to making offers on homes, the patient customer always comes out ahead. Don’t let your emotions and laziness cost you there. Home buying is a major purchase. Take your time.

Get a Competent Agent

Especially for a first time buyer, the whole process is very overwhelming. A competent agent can help answer all your questions as well as guide you through the whole process and give you advice on prices and things to ask the sellers for. Don’t make the mistake and believe that you can pocket part of the buyer agent commissions by not having one, as one mistake can cost you much more money.

In Fact, Every Transaction Should Have Two Agents

It’s perfectly legal to have one agent represent both the seller and the buyer, but it’s highly undesirable. A seller’s agent will make the case that since realtors are usually local, they will try to look after the buyer’s interest more so than the seller’s interest since they are moving away. Sure, this sounds logical, but how would the seller feel if he knows the agent is helping the buyer as well? Negotiations are a compromise between two parties, and a less than enthused seller benefits no one.

Read and Re-Read Every Single Document That Comes Your Way

Every time you are buying a house, you are helping provide a living for many, many families. Real estate is a huge industry with many smaller related businesses behind every transaction trying to sell buyers and sellers more products. Read every document carefully and make sure you know exactly what you are signing before you commit to something that you don’t know about.

Ask Every Question You Can Think of to Everybody Involved

In fact, have a notebook with you and write them all down so you don’t forget. The mortgage agent, realtor, fire insurance company, escrow company, and everyone involved all collect a fee for a decision that you are making. Ask them lots of questions, and make sure you bounce the same question off of multiple people to get a true gauge of the whole situation. The more you know, the less risk you are potentially taking.

Make a List of Everything You’ve Agreed To

Make sure that you get everything in writing. If someone promised you something, ask that person to email it to you so it’s on record. Also, there are many things you will be signing in the whole home buying process. Make sure you keep a list so you know everything you’ve signed up for. One product the mortgage company will likely sell you is an insurance policy in case you lose your job. They will give it to you free for the first year, but unless you want to pay for it to give yourself peace of mind, remember to cancel the service before they start charging you for it.

Don’t Be Afraid to Ask for What’s Fair

You may love a particular home, but don’t be afraid to negotiate. Chances are good that the agents, as well as the sellers, will work something out to accommodate your needs. If it’s a legitimate request, remember to ask.

But Before You Ask

Always seek the advice of the agent before you tell them what you’d like to ask for. Most of the time, the agent will suggest requesting for things that you haven’t thought of. But if you tell them what you’d like first, it’s less likely that they will provide an additional opinion. The other benefit is that her delivery of the request will likely sound more convincing since the request was the agent’s idea in the first place.

Other Suggestions for the First Time Home Buyer

  • ARM loans – ARM stands for adjustable rate mortgages, and it can actually make sense for those who have irregular income. This is a topic that needs a much lengthier discussion and is outside the scope of this article. (Click here if you want to learn more.) However, definitely talk to your mortgage broker to hear what he/she has to say about the loan product and whether it makes sense for you. Just don’t abuse this. Getting an ARM loan is not a way to qualify for a house you couldn’t afford.
  • Prepayment penalties – Make sure you ask whether your loan has a prepayment penalty. If it does, look elsewhere. Simple as that. You can double check your loan when you will receive the Truth in Lending Disclosure Statement. At the bottom of that page, make sure you see the words. PREPAYMENT: If you pay off your loan early, you will not have to pay a penalty.
  • Real estate as an investment – Most people over exaggerate how much real estate appreciates. Remember that every month you are living in your home, there are many expenses that go along with it. Buy your home because of the lifestyle, and you will be much happier than thinking about it as an investment.
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{ read the comments below or add one }

  • Adam Wilson says:

    It didn’t work well for me. The landlord got foreclosed on and I had to move.

  • Beau W. says:

    I wonder if there is any good rent too own programs out there. I only hear of the programs that mess over the buyer who signs up for the program. People are greedy. This could be such a great thing for people who want too buy the home.

    • David@MoneyNing.com says:

      The terms are often not great for the buyer, but it can work. I’m sure there are plenty of deals we don’t hear about though because they are private between the buyer and seller. I know of at least one person who bought the house from their landlord, but we wouldn’t have known unless they told us while our kids were on a play date.

  • Lloyd Bronson says:

    I am glad that your article brings to light the cons that may arise in regards to renting a home, such as not having enough income or credit to make the full purchase. My significant other and I are planning on moving in the near future, and ideally, we would like to move into a house but I do not believe we have enough upfront money to do so. He and I will continue researching to find a home that we will both be fond of.

  • Christie Boehme says:

    29 August 2019

    Subject: Rent2Own inquiry

    To Whom It May Concern:
    Our warmest greetings! My name is Christie Boehme. I am an Australian resident. I am married with a 19 yr old son. I am a Part time Permanent Assistant Nurse by profession. We moved into this area where we live now for nearly 5 years. My husband is currently studying and my son. My son once he graduated and found a job he will be on h iu s own.

    By the way, we were renting for 20 years. I am turning 58 years of age and my husband is turning 53 in 2020. I have heard about this Rent2Own scheme in Australia. And I have no knowledge about it. I don’t know if it’s safe. We were renting for 20 years and we are sick of moving and renting. Please give me an advise if th i s Rent2Oen scheme is safe. I am work too hard to support myself and my family. We thought about applying House and Lot loan because I just thought if we qualify then we don’t need to go through the Stress of moving, being kick out because the Owner decides to sell the property and go through the stressful situation of moving and exhaustion from packing and unpacking, etc. Can you please direct us to the right Property Seller and Bank financier please.

    Thank you and Kind regards. Please email me. We are looking forward to your immediate reply.

    Christie Boehme
    Assistant Nurse

  • DNN says:

    Renting is not good business.

  • T Ford says:

    My husband and I are renting a house but it’s still out of our price range for a 2br 2 ba, I have been helping our landlord with the other houses that she owns and she asked us if we wanted to rent to own one of her other houses, and that she owes a mortgage on this one, but oans the other one, and we can buy it from her and it will be $200.00 cheaper than renting it, she also asked us if we could be her maintenance people, sence this house had problems that we fixed when we moved in, and her maintenance person was not reliable, the house she wants us to move into needs work but I believe it has a lot of potential and a 3 br 1ba, I can fix it up the way that I want it, and I have noticed that we have the same taste for decorating would this be a good idea for rent to own.

  • Boat says:

    Just want to give y’all an insight into Mortgage Financing as far as this subject is concerned. I am a loan officer. Most people get into these “Rent to Own” contracts forgetting they have to secure financing to buy the property at the end of the term. In mortgage financing your credit/liabilities, income and assets play a key role in the approval of the loan application. You may be ok to enter into the contract now but there’re questions to be asked; what happens if my credit doesn’t meet the minimum requirement to secure mortgage financing at the end of the contract? What if my assets not enough to finance the transaction? What if my income/hours also drop at work? What if I lose my job at the end? What if I change jobs? ALL these can affect the loan application. If you can’t answer any of these questions please be careful and don’t sign any contract.

  • Gary nelson says:

    Hi I’m 51 of age and I recently qualified for a USDA direct loan and I’m disabled and don’t have the closing cost money or the inspection money stuff like that. that is why I was intrested in rent to own program. I am looking for 1 to 2 bedroom house in my area .

  • Denise says:

    I liked this read. The advise was very good i am a middle age woman looking for a house to own. Will take your advise and will look for a house. Thank you

  • Wendy says:

    Hi
    I’m deaf woman that looking for 4 bedrooms including 4 batrooms flat house must have the ECO-Healthy savings living conditions & nveno water /swimming pool
    Front & back porch, cottages for cat live in saftey area
    I have bad collection credit and it’s hard to get me rent on my own house in many yrs now
    My times ‘re now and I want it own house
    Here today this area is bad condition !!

  • Jackie says:

    I am very interested in the rental to own program. I also would be very thankful for any help I can get! I am 55 years old. I am disabled. Please I am looking for a 2 bedroom, 1, it 2 bathrooms. I am so ready for this move!

  • Victoria Dillard says:

    I’m a single mom of two. We own our coop apartment but it’s a one bedroom. Rentals in my NY require an income of $100,000 or more for a 3 bedroom rental. My income is to low for us to rent. It seems that ownership is my only option. Is it a bad idea to consider rent to own in my situation? We need more space and need time to sell or sublet our coop. Is there a better option?

  • Edyie Russell says:

    I’m interested in rent to own and any help I can get will be extremely helpful. Thanks so much,

    Edyie Russell

  • Carlos Mendez says:

    I got money for down payment but can’t show proof of income, I am self employed.

  • Adam says:

    Hi,

    Could I get a list of reputable companies doing rent to own in the south Austin area?

    Adam

  • healthy food niche says:

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  • dario says:

    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.

    • Cortney says:

      THANKYOU for all your insight ,it really makes you think about Every stone.Iam on dialysis and am a mom with 2 little people to take care of.So owning a home is a very huge DREAM and something like this in the first 10 seconds of reading seems like I would of signed on the dotted line just to have that dream a little bit closer without looking at All you have provided,Pros and cons.Thankyou for sharing
      It stops Nice but a lil Neive
      Person from jumping in a pool before looking at what she’s jumping into.Sometimes there was not even water .Ouch!Lol!
      Thankyou again,Cortney #2fishandaloaf 🙂

  • Marbella says:

    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.

  • MoneyPig says:

    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.

  • John says:

    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

  • Patrick R. Carlson says:

    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.

  • MoneyPerk says:

    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.

  • 20 and Engaged says:

    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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