Is Buying A Rent To Own Home A Good Idea

Today we are going to discuss whether rent to own is a good way to purchase a house or not. You may hear other terms for rent to own like lease to own or lease option to buy.

While not terribly popular in New England because of the strong housing market, rent to own homes can still be found.

I probably get several calls a month from hopeful home buyers looking for a home they can lease to own. The rent to own or lease option gives hope to many people who want to buy a home instead of renting forever.

You will usually find more rent-to-own opportunities in slower real estate markets where homes are sitting unsold for longer periods of time. In stronger markets like the Greater Boston area, lease-to-own options are much less common.

When you buy a home as a rent to own, it allows the potential sale of a home while the landlord covers costs waiting for you to perform on the purchase.

As well, as allowing the home buyer to accrue a down payment and improve their credit to allow them to get a conventional mortgage.

How Does Rent To Own Work For Homes?

You can rent to own many different items, whether it is a TV, a couch, or an entire bedroom set. But this article will focus on renting to own homes.

What is Rent to Own?

Rent to own is where a renter/buyer and a seller agree to a predetermined price where the buyer rents a house and has the option to purchase the house they are renting before the lease runs out. Typically it is a one, two or three-year option to buy in the rent to own contract.

In return for the option to purchase the home, the renter pays an agreed-upon option fee usually in the arena of 20% of the rent. So if the rent is $2000 a month you would be paying an additional $400 dollars a month in option fees.

The option fee will be converted towards a down payment should the renter exercise the option to buy.

Why Would A Seller Rent To Own?

The availability of rent-to-own homes rise when the real estate market softens and it is harder for a seller to secure a buyer.

In a tough buyer’s market, a seller could opt to rent to own their house to open up to a larger pool of buyers, with the hopes of getting the home sold in the near future.

Some sellers may also prefer steady rental income while waiting for market conditions to improve.

Why Rent To Own vs Getting a Mortgage?

More often than not a renter/buyer does not have the proper qualifications to secure a traditional mortgage. It could be a homebuyer has bad credit, their debt-to-income ratio is too high, they have not worked a job long enough, etc.

The rent to own a house option seems attractive. It allows the home buyer time to fix their credit or other situations that may prevent a borrower from getting approved for a mortgage.

Usually, the renter/buyer has a credit score that is too low to purchase a home or their credit may be fine but they need to pull a down payment and closing costs together.

It is also an option for people who may not be fully committed to buying but want to keep their options open. A renter can “test drive” a home before buying.

For buyers relocating to a new area, rent to own can provide extra time to learn about the neighborhood before fully committing.

Is Rent to Own House a Good Way to Purchase A Home?

For 98% of the folks looking to rent to own, I implore you to think carefully.

You are probably looking at rent to own homes for all the wrong reasons. The reason you can’t get a mortgage is exactly the reason you should not rent to own. Impulse! Control it.

Take the time to fix your fico score and purchase a home with a traditional mortgage product. Don’t put the cart before the horse.

I certainly do not want to discourage someone to purchase a home with a rent to own scenario, but understand th e road ahead of you.

Advantages and Disadvantages of Rent To Own

The Advantages Of Renting A Home With An Option To Buy

Secure A Purchase Price – Renting to own a home allows you to secure a purchase price. If prices rise, great! If prices fall then you have the option to back out.
Test Drive The Home – Buying a home through a rent to own contract allows you to test drive a home. Not only do you have time to see if the home is a good fit, but you also get a chance to find out if the neighborhood and the surrounding area are right for your family.
Move less – A home that is rent to own is great for a buyer who is committed to purchasing and wants to set roots in a community.
Build equity – Often there is a premium paid in a rent to own contract. The premium often goes toward the purchase price which creates automatic savings to go towards a down payment.

The Disadvantages Of Renting A Home With An Option To Buy

Your Option Premium Is Wasted – If you decide not to close or can’t close your option fee is non-refundable.
You’re Locked Into A Purchase Price – Home prices in your area can go up or down.
It May Benefit The Seller More Than You – In many situations sellers are leveraging the buyer’s inability to qualify today.
Rent to own contracts are very seller-weighted – Many buyers entering these agreements have limited options which puts sellers in a stronger negotiating position.
You will be responsible for all the maintenance – Unlike a standard rental, many rent-to-own agreements expect the future buyer to handle repairs and upkeep.
You still have the lease terms to abide by – Violating lease terms may void the purchase option.
Limited pool of homes to choose from – Inventory for rent-to-own homes is usually extremely limited.

The Devil Is In The Details Of The Rent To Own Contract

Everything in a rent own contract is negotiable. Do not get involved in a contract to purchase a rent to own house without the contract being a win-win for both buyer and seller.

Here are a few points to consider when a contract on a lease-to-own option is drawn up:

Hire an attorney. Have an attorney review the rent to own contract so they can explain the potential downsides and negotiate better terms if needed.
Do a Home Inspection. A home inspection can reveal current deficiencies as well as upcoming maintenance concerns.
Get an appraisal. An appraisal confirms that you are paying fair market value for the home.
Make sure whatever is preventing you from buying today can realistically be corrected before the option period ends.
Understand the downside of the contract before signing anything.

Find Rent To Own Homes in Massachusetts

Finding affordable homes for rent to own can be difficult. Rent to own homes in Massachusetts are a little harder to find than in some other parts of the country.

There are companies that may purchase a home and set you up with a rent to own contract with a house of your liking.

Especially in competitive areas like Greater Boston, sellers can often sell traditionally without offering lease-option agreements.

Ways To Search For Rent To Own Homes

Network with friends and family
Have your real estate agent contact other agents
Look at For Sale By Owner properties
Talk to landlords
Search online for “rent to own homes near me”

Is Buying A Rent To Own Home A Good Idea?

Rent-to-own homes have the potential to become bad investments in some situations.

While there are advantages, there are also significant risks buyers need to understand fully before signing a contract.

Many agreements heavily favor the seller. The consequence can be spending a large amount of money without ending up owning the property.

Buyers should carefully review how option fees, maintenance responsibilities, and financing deadlines are structured within the agreement.

Definitely consult an attorney when it comes time to review and sign a rent to own contract.

As far as saving for a down payment? Just take a savings account and add 20% of your rent into that account every month. That is essentially what you are doing anyway with a rent to own agreement.

You can buy a house for as little as 3-5% down with very competitive interest rates.

Also, explore down payment assistance programs in your area.

A $300,000 home may only require a down payment between $9,000 to $15,000 depending on the loan program.

There are still some No Money Down Loan Programs available, although they are not available to every buyer.

If you want to explore financing options or work on your credit give me a call, I will set you up with the right professionals to get you buying in no time.

Other Related Real Estate Resources:

Luke Skar- Buy a Home With 0% Financing
Teresa Cowart- Is a Purchase Option Right for Me
Bill Gassett- Fixing Credit Report Errors
Paul Sian- 7 Thing to do Before Purchasing a Home

This article about Is Rent to Own A good Way to Purchase a House? is written by Kevin Vitali of EXIT Realty a Massachusetts REALTOR. Need help buying or selling a home? Give me a call at 978-360-0422 or email me at kevin@kevinvitali.com

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Is Rent to Own A Good Way to Purchase a Home?