You share the American Dream and want to own a home but your savings are minimal and your credit is ailing after years of economic insecurity. There is a dream deferred option — it’s called rent-to-own and it allows people to work towards home ownership gradually.
Renting to own is a little like moving in together or having a long engagement before marriage. It’s a commitment but gradual. While state laws vary and individual contracts will have their own conditions, let’s look at how rent-to-own agreements generally work.
Renting To Own
According to Investopedia, an advantage of rent-to-own contracts is that they allow a prospective home owner to move into the place they plan to purchase with an option to buy down the line, usually one to three years later. That means the prospective purchaser has time to save money for a substantial down payment or to repair an ailing credit score.
But rent-to-own contracts involve more than just moving in, paying rent, and eventually deciding to purchase. The contract will lay out conditions for purchase and if these are not all met, the renter may never become an owner and can lose a lot of money.
Rent-to-own contracts usually involve an “option” payment, meaning the tenant is paying for the possibility of purchase, sometimes an obligation, sometimes a right to buy, depending on the deal terms. It’s like a deposit on the purchase option, which may be forfeited if the proper conditions aren’t met.
Tenants also pay rent, a percentage of which can be credited toward the purchase of the home, depending on the deal terms. That may mean paying more for a place than the normal “going rate.” If for whatever reason you do not exercise the option to buy, or the owner successfully denies the option, you risk losing money, and that can add up to a lot if you have been paying higher-than-average rent for a few years.
In rent-to-own contracts a purchase price can be agreed upon at the time of signing or one term of the deal may be to designate a price when purchase occurs. Real estate market conditions fluctuate so it’s hard to predict which would be a wiser choice and may depend on the location of the property. In some major cities, property is almost always hot. In many remote locations, it is usually not.
There are lots of little wrinkles to consider when purchasing a home, particularly in this protracted way. Do not go it alone. Talk to a lawyer.