What is Rent to Own?

Don’t let the prospects of buying, renting, or renting-to-own overwhelm you! While there is so much information out there and so many options when it comes to finding a new home, we hope to help make things a little easier to understand. Rent to Own is different from both owning and renting. Is it the right choice for you? Read on for an explanation as well as some pros and cons.

Let’s say you want to own a home but cannot currently secure financing for a down-payment or afford other initial moving costs. Renting to own might be a good route for you. This option allows you to make small payments on the home you live in while still paying the current owner for rent. Really, you’re leasing the home and making rent payments that are partially applied toward the price to buy the home. After a few years of living in the home, you will have some equity in the home’s value and will have another chance at financing. Generally, there is still a relatively small initial cost as rent to own tenants must pay a fee in order to get the rent to own option. This is an investment you make to start the process, which will eventually go toward the final cost of the home. Generally, the option rate is around 3%-5% but can range from 2.5% to 7% of the home’s value. The amount of rent that goes towards ownership must be negotiated between the buyer and seller. The best agreements can put you in a situation to purchase your home after two years of renting.

Pros and Cons of Rent to Own:

Pro: This method allows you to invest in owning a home while still in the rental stage. Instead of paying rent to live in one home while you’re saving to buy another, you can pay a portion of your rent money toward owning the home you live in.

Con: You might spend more money over time. Of course, the worth of your home is determined by more than just a dollar amount, but the total amount you pay for your home will likely be higher with rent to own options that if you were able to simply purchase the home.

Con: Many homes with this option are in less-than-ideal areas. One reason why an owner might want to give potential buyers the rent to own option is that they are having a hard time selling the home. Homes in ideal areas sell more quickly and easily and are less likely to have the option of rent to own.

Pro: You will have more time to deal with the bank. Sometimes the home-buying process can feel rushed and stressful in dealing with financial institutions and waiting on approvals, loans, and appraisals to go through. With rent to own, you postpone acquiring a mortgage and get straight to investing in your home.

Con: There's no way to predict which way mortgage rates will go. It's possible that mortgage rates will go up by the time you are ready to secure a mortgage. 

Con: The tenant is in charge of the maintenance. You can no longer expect your landlord to come fix your leaky faucet or old windows. Once you decide to go on the rent to own journey, the home and its maintenance are your responsibility. 

Pro: It allows buyers to “try out” living in a neighborhood or a new home without making a final commitment. You don’t have to buy the home at the end of the rent-to-own session. This is different than actually purchasing a home, which means you’re responsible for selling it if you no longer want to live there. 

We hope this post helped you understand the unusual process that is rent to own. If you are considering this option, be sure to work with a Realtor who has experience in rent to own transactions. If you have any questions or more info to share, please do so in the comments below or contact us here


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