Wallet Heroes - Rent to Own Advertorial

Now, if you’re wondering how rent-to-own works, there’s something you should know.

Traditionally, there have only been two ways to have a roof over your head:

To lease an apartment and pay rent every month.
To buy a home, by taking out a mortgage or by paying the seller in cash.

However, there's a third way that doesn't tend to get a lot of attention: rent-to-own homes.

The rent-to-own path to buying property is not a very common one, but it is an opportunity you might want to look out for — especially if there is a downturn in the real estate market.

Unfortunately, the rent-to-own model is not as straightforward as it seems.

That's why we've created this guide for what to expect along this pathway to homeownership… and what to look out for.

Lease-option vs. lease-purchase agreements

There are two primary types of contracts that can be entered into a rent-to-own agreement.

Lease-option agreements

The lease-option agreement, which is the most flexible and friendly agreement for renters/buyers, gives consumers the right (with no contractual obligation) to buy the home they've been renting once the lease expires. If for some reason you choose not to buy the property or are unable to, there's no financial penalty for walking away after the lease ends.

Lease-purchase agreements

Lease-purchase contracts are less forgiving. In this type of agreement, you are legally required to purchase the home at the end of the lease, whether you can afford (or want) to or not. If for some reason you no longer want to live at the property after the lease is over, or you are unable to pay in cash or qualify for a mortgage, you will be in serious breach of contract.

Definitely be on the lookout for this language as you're reviewing contracts with your landlord. Since legalese can be complicated, it's best to consult with a qualified real estate attorney before signing any documents.

The purchase price

A key component of a rent-to-own agreement is the purchase price of the home — or specification regarding when it will be determined. Depending on the seller's particular situation, the purchase price will either be set in stone at the signing of the lease, or it will be determined when the lease expires, based on the current market value of the property. For buyers, it's best to lock in the price of the home at the start of the lease in case property values rise in your local real estate market while you are renting.

Similar to a down payment, a rent-to-own lease will often begin with paying an option fee. It's often between 1 percent and 7 percent of the purchase price of the home (much cheaper than the 20 percent down payment for a mortgage). This will also be deducted from the final purchase price later on.

Rent vs. principal

When you're on a rent-to-own plan, a percentage of the rent you pay every month should be going toward the purchase price of the home.

For example, if your rent is $2,000 per month for two years, and 25 percent of that goes toward the purchase price, you'll be paying $500 toward the principal cost of your home per month or $6,000 per year.

Your contract will clearly spell out how much of your monthly payments are going toward the cost of the home. This is also something you can negotiate with the landlord.

Note, however, that the more rent that goes toward the purchase price, the higher your monthly rent payment will likely be.

Buying the home

With a lease-purchase agreement, you will be required to buy the home once your lease has ended.

If you have a lease-option agreement, once the lease has ended, you can decide whether you want to buy the home or not. Oftentimes, this will involve taking out a mortgage so you can pay the seller in full. If you are unable to qualify for financing or otherwise come up with the cash needed to buy the home outright, you will be forced to move just like the end of a rental lease — and you will likely forfeit all of the money you paid toward the purchase price, including the option fee and the above-market rent price.

If you're able to secure financing or pay the rest of the purchase price, congratulations — the home is yours!

What to look out for

The rent-to-own pathway to homeownership can be a great tool for aspiring homeowners who don't have their finances in order yet to qualify for a mortgage but are ready to move into the home of their dreams.

However, the nature of the model can easily make this a much better arrangement for the seller than the buyer. Here are some things to keep in mind while looking for a rent-to-own home, as well as potential issues to be aware of:

While you are living in a rent-to-own home, you will likely be paying more in rent than you normally would in a comparable property because some of your fees are going directly toward the purchase price of the home.
In spite of this, even when you finish your lease term, you will still have a substantial amount of money left on the purchase price. You could end up paying more for your home in the long run than with a mortgage or by buying outright.
Even though you're technically a renter, many landlords will require you to be responsible for repairs and maintenance of the property while you live in the space. Ask your landlord about this and carefully read the lease agreement before signing.
Double-check that the landlord can't evict you for minor infractions or for breaking small rules. After all, if you get evicted, you would forfeit all of the money you've paid toward the home's down payment.

Rent-to-own homes come with challenges and limitations, but they can be a great vehicle for buyers to make their homeownership dreams come true.

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