March 31, 2022
As prices of many houses across the U.S. continue to increase, many aspiring homeowners are left wondering how they can afford the house they want. A great portion of Americans – especially first-time homebuyers – can find the process of purchasing a home to be a struggle for various reasons: bad or poor credit, a low income, overwhelming debt, and a host of other factors. Consumers like these can benefit from an option such as rent to own homes.
The Rent-To-Own Process
In a rent-to-own agreement, a tenant enters into a deal that stipulates they must rent a property for a set period of time, and at the end of that period they have the option to buy the property before the lease expires. This option to buy comes with an option fee, the price of which varies from contract to contract, but is usually in the range of 1% to 5% of the property purchase price. Two of the most common rent-to-own contracts are lease-option and lease-purchase. In a lease-option contract, you are afforded the option to purchase the property you are renting at the end of the lease, but you are not required to buy. On the other hand, lease-purchase contracts often obligate the tenant to buy the rent-to-own property when the lease expires (1).
Rent-To-Own Advantages
A rent-to-own arrangement allows you to save money towards a down payment. Rent-to-own contracts enable you to apply a specific percentage of the rent you pay to the down payment on that specific rent to own property, making it more affordable. You can also split repair costs between you and your landlord, saving money on repair that you would have spent on in the case of buying a house outright. Finally – in the case of a lease-option contract – it is up to you to purchase to house at the termination of the lease, or choose to walk away and not buy if you end up not liking the property. There is no penalty for the decision not to buy in a lease-option contract. Consulting a professional real estate lawyer is a sound idea to make sure any contract you sign has this option (2).
Rent-To-Own Disadvantages
Be sure that you know for yourself as the tenant what your personal financial situation is before entering into a rent-to-own contract. You could potentially lose money that would have been used towards your down payment if you decide not to purchase the property. You also cannot get the option fee refunded. Furthermore, if you don’t qualify for and cannot secure a home loan, you give up your right to buy the property. Be sure beforehand that you will be able to get a home loan before signing a rent-to-own contract.
Rising Home Prices
According to Zillow.com: “2021 home value growth exceeded median salaries in 25 of 38 major metros” (3). The fact that the prices of these house listings are outpacing many of the salaries in these regional housing markets in the U.S. is a compelling reason for aspiring homebuyers to search for a rent to own house this year.
Decide What Is Right For You
At the end of the day, renting to own depends on the individual/family’s preference, risk tolerance and financial situation. Moving into a rent-to-own house can be a great option for you – if you are committed to the path of homeownership and have weighed the pros and cons of living in a rent-to-own home beforehand.
Sources:
1. https://www.investopedia.com/updates/rent-to-own-homes/
2. https://www.rocketmortgage.com/learn/rent-to-own
3. https://www.zillow.com/research/home-value-appreciation-incomes-30862/
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