Pros and Cons of Rent to Own Properties

"Rent to Own" is a highly used term that even real estate dummies or newbie homeowners have likely heard. The phrases "rent to own home" or "rent to own deals" might be heard in conversations among friends and relatives seeking rental properties near their work place, hoping to hit two birds with one stone by putting their monthly rent towards a down payment.

For anyone eager to kickstart their homebuyer's journey, entering a rent to own agreement or rent to own contract is an available alternative to purchasing a property.

Read on below to get the basics the Rent to Own method of buying a property and figure out if it's the right purchasing scheme for you. To do that, you need to know the advantages and disadvantages of entering a rent to own agreement.

What is Rent to Own?

In a nutshell, a rent to own contract allows prospective buyers to lease or rent a property for a specific period of time with an option to buy it at a specified point in the future.

A common appeal of the rent to own agreement is that part of the monthly rent is already put towards the purchase of the home, allowing a leaseholder to save on the down payment. The pay upfront is nonrefundable and often up to 5% of the purchase price of the property.

How does Rent to Own work?

A buyer will have to enter into an agreement with the seller wherein they establish the purchase price for the property in their rent to own contract. At a specified point in the future, the buyer can buy the property for that purchase price regardless of the property's worth.

A buyer will pay a higher monthly rent and part of that money will be set aside by the owner toward acquiring property ownership. In time, the buyer gains equity. This makes getting a home loan easier since the equity will help reduce or eliminate the required down payment.

Pros of Rent to Own

Here at the biggest advantages of most rent to own agreements:

You don't have to qualify for a home loan.

With the rent to own method, prospective homeowners can buy a home with bad or zero credit. In the course of completing the rental period or monthly rent payments, buyers can work towards rebuilding their credit score and can eventually get a load once it's time to buy the property.

Agree on a purchase price and lock it in.

Given the ever increasing home prices in the market, rent to own agreements allow buyers to purchase a property at its current price. This take the anxiety out of letting prices go up in a prime area as a buyer puts off or saves up for a down payment. Buyers also have the option to back out if home prices fall although this will depend on how much they have paid under the lease purchase agreement.

PRO TIP: Purchasing a property directly from a developer puts a buyer at an advantage of getting the property while on promotion rate.
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No war bidding with other prospective buyers.

Signing lease purchase agreements gives buyers the right to the house as long as they comply with the rent to own contracts' terms. They don't have to worry over losing to another interested party so long as they stay on top of their monthly payments.

Experience living in the property prior to owning it.

A rent to own deal permits buyers to take the property on a test drive before committing to purchase the property. This will give them the time to learn about the property's issues and other problems so solutions can be addressed by the owner.

Cons of Rent to Own

The rent to own lease option agreement does have its flaws. Find out below if the disadvantages outweigh its benefits.

Prepare to pay a higher rent.

Rent to own homes have trouble attracting buyers due to high monthly rent they entail. This is due to the fact that the owner has to set aside some of the money from the monthly payment to assist a buyer in building equity.

Expect maintenance costs and other fees to go up.

Buyers usually have to pay an upfront fee as soon as they get into a rent to own contract (and prepare for a refund should things go south).

They too will have to shoulder repairs and maintenance expenses and be prepared to shell out money for unexpected emergencies. Other concerns might also come up along the way such as title issues of the property. Make sure to stay on top of a property's documents before committing to it.

Risk of losing equity.

You could be religiously honoring your rent to own monthly payments but if the owner is less than responsible in staying on top of their mortgage payments, this puts them and you at risk of losing the property through foreclosure. Buyers could also be forced to incur legal bills if the seller tries to back out of the contract after you've already spent the money.

Late payments and failure to meet contract requirements can put you at financial and legal risk.

Depending on a buyer's agreement with the owner, not paying rent on time puts a buyer at risk of losing the right to the property along with previous additional payments. If the agreement is a lease purchase instead of a lease option, a buyer could also lose more than the money already paid. The failure to meet deals as states on the contract could leave a buyer with a costly legal bind.

Takeaways

The downsides of rent to own deals can make it a risky method. Be forewarned that scams are rampant and can take advantage of those with poor credit score. Despite engaging with an honest owner or seller, the volatile economy might still put a buyer at risk too of a possible forfeiture of the property when things don't go as planned.

It is best to consult with a real estate lawyer before entering any rent to own agreement.