In the ever changing environment of todays financial world, newer home owners are looking for a little bit different way to owning their own property. Rent-to-own is a less common but one of the gaining traction options (Fig 1) Also known as a lease option or just a lease-to-own, this hybrid renting and buying proposition can be attractive to certain renters. But of course, as with any financial move out there in the world—rent-to-own offers its own set of pros and cons. Below, we will unpack the good and bad of these contracts in our current financial ecosystem.
What is a Rent-to-Own Agreement?
What is a Rent-to-Own Agreement and how does it Work, you may ask? This occurs when a buyer rents the property for an agreed time, commonly between 1-3 years, and then has the option to buy before their lease is up. Part of the monthly rent is usually put towards the future down payment or purchase price.
Pros of Rent-to-Own Agreements
1. Path to Homeownership for Credit-Challenged Buyers
First and foremost, rent-to-own agreements offer homeownership for those who aren’t able to secure traditional mortgage financing because of credit issues or not enough saved up for a down payment. The buyer then gets the benefit of being able to work on increasing their credit as well as growing a down payment while living in the future home.
2. Lock-In Purchase Price
Most rental option contracts have the sales price determined at the date of its signing. In a market where property prices increase, the buyer is at an advantage as they can perhaps buy beneath actual levels when leases expire.
3. Try Before You Buy
Rent-to-own contracts allow would-be buyers to live in the home before deciding whether to buy. It is like a “test period” that can help learners judge if the house and environment are really what they expected when it is not too late because of the mortgage.
4. Gradual Transition to Homeownership
The prospect of shifting from being a tenant to an owner is enough to make many first-time homebuyers quake in their boots. A renting-to-own option can be an interim solution that offers homeownership training wheels without the full commitment from either party.
5. Potential for Equity Building
This means that assuming the agreement is structured properly, a portion of your monthly rent payment can be credited toward the purchase price. This allows the tenant/buyer to start building equity in the home before they own it.
Cons of Rent-to-Own Agreements
1. Higher Monthly Payments
Like any form of renting, you might have larger monthly payments in a rent-to-own agreement than when compared to traditional rentals. This is because a part of the rent would usually be set aside for your potential down payment or purchase price. This can be incredibly hard for most people today in the economy, as living costs have only risen and higher payments worsen that gap.
2. Risk of Losing Money
At the end of their lease term, if they do not buy or can not then all extra money that was paid in goes to the owner. This can lead to a large or even devastating financial loss in the worst of times economically.
3. Limited Flexibility
Should the tenant/buyer enter into a rent-to-own agreement, they may lose some freedom to up and move for job opportunities or other life changes. More felicitous consequences on work than in a career that is moving faster and more common, Malhotra noted.
4. Responsibility for Maintenance and Repairs
Most lease-to-own contracts require a tenant/buyer to become responsible for duties that landlords usually perform, like maintenance and repairs. In a world where unexpected expenses are especially difficult, these added costs can stretch people thin.
5. Potential for Predatory Agreements
Others, such as those shady title lenders who walked away with Randy Ocean money that morning because they couldn’t come up with another $1,000 in three days to renew his interest rate-free loan on a 2009 Chrysler Sebring Convertible may involve rent-to-own agreements and are designed or can be structured — there’s room for interpretation — as rip-offs. That is especially true in today’s fast-paced market where terms can become complex and/or unfavorable, and prospective but impatient buyers feel compelled to sign.
6. Market Uncertainty
Committing to a purchase price is an advantage if property prices climb, but could be a negative should values decrease. In the current shaky economic environment, he says there’s always a possibility that this agreed-upon sale price might exceed what they could get for his house at the end of their purchase lease.
Navigating Rent-to-Own in Today’s Economy
Rent-to-own agreements should be made with caution, particularly in the current economic climate which is seeing inflation fears soaring interest rates, and housing market factors still up for question. Some Considerations For Those Thinking About This Option
Do your due diligence by knowing the market: Know what is going on with local real estate and future projections, so you can make an informed judgment as to locking in that purchase price.
Have the contract state everything: Specify all of those terms in the lease, including how much rent credits are toward a purchase each month, as well as an option fee and purchase price.
Be sure to get advice from a professional: Work with real estate attorneys or financial advisors so you know what the terms mean and tell them exactly how much work has been done upfront if applicable.
Plan carefully: Ensure that you have a plan in place to get your credit score up and save for the down payment throughout this lease term.
Look at your alternatives: A whole wide range of options could open up, check out FHA loans or down payment assistance programs that might be the key to homeownership;
Overall, this type of agreement can be a good option for certain individuals to go down the road of home ownership and everyone knows how quickly renting money away from an investment you will never own gets old quickly. But, they have their risks and downsides too. Like all big financial choices, really think through your own situation before you enter into a rent-to-own.