In a rent-to-own (or lease-to-own) agreement, you pay your landlord an agreed-upon percentage of extra rent per month, which is credited towards your down payment. This is a way for renters to begin investing in a property they want to own without the immediate commitment of a mortgage and down payment.
There are two kinds of agreements in rent-to-own scenarios.
- Rent with the option to buy: This agreement leaves things open-ended. The tenant has the option to buy the home after a given period of time but is not committed to doing so from the start.
- Rent to buy: In this agreement, the tenant agrees to purchase the home after a given period of time.
If you are leasing to own, there are some other details to get smoothed out.
Agree on the home price. The value of the home now will not be the same price you’ll pay for the home once you finish your lease period. The landlord and tenant must agree upon a set home price, which will typically be more expensive than the home’s current value to account for inflation and changes in the housing market.
Determine the length of the rental. You and the landlord will need to agree on how long you will be leasing before you buy the home.
Agree on maintenance responsibilities. Under a normal lease, the landlord is responsible for all maintenance, but lease-to-own scenarios are different. You’ll have to decide who is responsible for taking care of the property before the house becomes yours.
Pay the option fee. This is the fee you’ll pay to ensure you have the option of buying the home once your lease is up. This fee can range between 1 and 5% of the home value.
As you approach the end of your rental period, you will need to look for a mortgage. Many renters think they are avoiding this by renting to own, but the process at the end is still the same. The only difference is that you don’t have to compete against other buyers.
In most cases, rent-to-own is made possible by a landlord who no longer wants the property but isn’t quite ready to sell. Other times, homeowners who have been trying to sell with no success will allow a rent-to-own option to start making a profit off their home now.
Rent-to-own sounds nice, but it’s just another way to pour money down the drain that could otherwise be invested in your dream home. There are serious downsides to the rent-to-own option:
- You don’t actually own the home (yet)
- You are buying the home at a higher price
- You still have to get a mortgage
- You need to pay an option fee
- Most people sell their first home within years
Several organizations capitalize on the popularity of renting to own and make it easy for customers to get started. Two of the most popular options are ZeroDown and Divvy. However, you’re better off using a down-payment investment partnership like ours, rather than pouring money into a rent-to-own agreement, for the reasons outlined above.