What Does Rent to Own Mean in Real Estate?

If you don’t have money saved for a down payment but renting feels like you are wasting cash, rent-to-own homes are an option that might be a better fit. Rent to own offers some of the advantages of buying and renting. Could it be right for you?

If you are contemplating buying your first home but don't meet the qualifications yet, renting to own could be an excellent option.

But how does rent-to-own work, and what do you need to know before choosing this option? Let's examine what rent-to-own homes are and what you should know about them.

What are Rent-to-Own Homes?

A rent-to-own agreement allows you to purchase the home you are renting. You will likely pay more than other rentals if you sign this kind of agreement. However, this extra money will become your down payment when the lease ends.

There could be an "option fee" to pay when choosing this arrangement, which might cost you between 2% and 7% of the home’s value. If you don’t buy the home, you will lose this and the extra you have paid in rent.

How Does Rent to Own Work?

With a rent-to-own home, your rent payments help you eventually buy the property. Part of your rent will become your down payment when you decide to buy at the end of the lease.

The Advantages of Rent-to-Own

• Save for a down payment. While renting the home, some of your rent will contribute to your down payment. During this time, you can ensure the home is right for you before you buy.
• Reduced repair costs. These agreements usually split the repair costs between the landlord and the tenant. This might mean youonly have to pay for the smaller repair jobs, with the landlord taking care of the larger bills.
• You can buy or move out at the end of the lease. If you still want to buy and have the finances necessary, you can get a mortgage and buy the home. Otherwise, you can move out.

The Disadvantages of Rent-to-Own

• If you don’t buy, you will lose money. If you decide not to buy the home at the end of the lease, the extra rent money will stay with the landlord, along with any option fee.
• You might not qualify for a mortgage. Even if you want to buy, your finances might not allow you. Without a mortgage, you will forfeit the extra money you have paid and could be looking for a new home to rent when the lease ends.

When Should You Consider Rent-to-Own?

In some situations, this arrangement will work out better:

• When you need to save for a down payment. With more money, you can save a lot over the loan term with reduced mortgage insurance and better interest rates.
• When you need to improve your credit score. If you don’t have the best credit, it can be difficult to get a mortgage, and if you do, the terms will be less favorable. With time, you can improve your credit score.
• If you are sure you want to live in the home. If the area and the home are right for you, there should be less chance that you will change your mind when the lease ends and lose the extra money you’ve spent on rent.
• When you have difficulty saving. If you find it hard to save a down payment, this option does it for you.

When Rent-to-Own isn’t Such a Good Idea

If you are in the following situations, other options might work better:

• If you aren’t sure you’ll get a loan. If you have doubts about qualifying for the loan, you will need it when the lease ends, normal rentals are a safer option.
• When you aren’t sure where you want to live. This isn't a good option if you have doubts about the house or the location.
• If you don’t always pay your rent on time. Not paying on time every month might mean you lose the extra money paid in rent that month.

Rent-to-Own Contracts

There are two main types of rent-to-own contracts:

Lease option agreement

You must pay an option fee, and the price will be decided when the lease expires. An appraisal is usually used to determine the price at the end of the lease. You don’t have to buy the home when the lease expires.

Lease purchase agreement

This obligates you to purchase the home at the end of the lease for a price that might be agreed upon at the start. This gives you more time to find the best mortgage, but if you don’t buy, the seller could sue you for breaching the contract.

Final Thoughts on Rent-to Own-Homes

Going from a renter to a homeowner can be exciting, but you must be well-prepared. There is more to meet the eye regarding the financial ramifications of homeownership. 

It can be a costly mistake to jump into the real estate market before you're ready. Make sure you have a significant emergency fund before moving forward. When you least expect it, a problem could devastate your finances.

Additional Resources

• Rental Scams To Be On The Lookout For - When it comes to renting a place to live the scammers are more than willing to make someone believe they have the best place for rent at a great price.  Always be skeptical and make sure you see in person the place you will be renting.
• Rent or Buy? - Depending on where you want to live and how long you plan to live there the rent or buy decision is something to consider.  Especially in an area where it is cheaper to rent doing so may be a wise move.
• Avoiding Buyers Remorse - Don't buy a home that you will regret in the end.  A home buyer should be understanding everything about the home buying process before making an offer.

About the author: The above article “What Does Rent to Own Mean in Real Estate?” was provided by Paul Sian. Paul can be reached at paul@CinciNKYRealEstate.com or by phone at 513-560-8002. If you’re thinking of selling or buying your investment or commercial business property I would love to share my marketing knowledge and expertise to help you.  Contact me today!

I service the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.