Problems to Look Out For With Rent to Own Homes

By
Real Estate Agent with RE/MAX Executive Realty 91362

The Guide to Renting to Own a House

Have you heard about renting to own and wondered what it was all about? For many people, buying their own home is a dream that seems all too difficult to attain. A rent to own agreement can seem like the answer to getting on the property ladder. But there are some problems with rent to own that may not be immediately obvious.

Let's take a look at what you need to know so that you don't get trapped in an agreement you might regret. Keep reading, and you'll find out all of the downsides of rent to own homes. Some of these problems may not be worth it in the long run.

What is Rent to Own?

This is an arrangement where part of the rent you pay to the landlord goes towards a future purchase of the property. When the lease period ends, you will have the opportunity to buy the home at the price agreed. It means that you can start purchasing the house before you have qualified for a mortgage or saved a downpayment.

If you are looking at rent to own homes, unfortunately, things can go wrong in several ways, let's review the possible pitfalls.

There is Often Higher Rent

You can't expect to pay the usual amount of rent. The landlord will need you to pay more per month so that some of it can go towards a credit to purchase the home.

Not all of the extra you are paying may even go towards buying the home, either. These agreements will often include hidden fees that you will be paying each month. Additionally, these additional rent monies you pay may not even go towards purchasing the home if you don't take up the option to buy.

Even if you do buy the home, you may discover that the amount you have paid may not add up to as much as you might have imagined. A few hundred dollars a month will amount to less than $2,500 towards the home per year, and over a typical lease period, this may not be much towards the price you will have to pay.

As well as the extra rent you will be paying; you still need to save for a downpayment so that you can get a mortgage to purchase the home. Some of these downsides of rent to own are discussed in detail at Realty Times. If you are serious about entering into a rent to own arrangement, it will be worth reading.

Sometimes There Are Non-refundable Fees

When you enter into a rent to own agreement, you might be required to pay a hefty upfront fee. The fee will be nonrefundable and could be a significant amount of the agreed purchase price. The charge could be as high as 7% of the cost, though this is negotiable.

If you don't end up purchasing the home, this fee will be lost. You would do better to put this money in a savings account, where it will earn you interest, and you can use it toward a downpayment later on.

It would be smart on your part to negotiate away any fees that are charged upfront.

The Home Valuation Could Drop

When you enter into an agreement, the price you will pay for the home is set. Your lease term might last for five years before the option to buy the house becomes available, and a lot can happen in this time. If the housing market drops, you may find yourself with an option to purchase at a much higher price than the home is currently worth.

Property prices generally rise over time, but if the economy hits a rough patch, housing valuations will be reduced. This could mean you will lose money whether you buy the home or not when the option becomes available. Your lender isn't going to lend more than the property is worth, and this could prevent you from buying the home if you can't make up the difference.

Who Is Responsible For Repairs

Most of the time, the tenant will be expected to pay any repair costs as part of their rent to own agreement. The landlord won't want to spend money on the home that they will be selling soon, so this does make a lot of sense. However, you may end up funding the repairs on a home that you don't actually purchase.

Make sure this is discussed upfront and try to negotiate with the owner so that you are not responsible for any repairs during the time of the lease period. Doing so is far more equitable and would be the case in most straight rental agreements.

Breach of Contract

You will need to stick to the agreement because missing rent payments could cancel your rent to own contract. This will mean that you will lose the extra money you have paid, both in upfront fees and rent.

Even if you carefully stick to the rules set out in the contract, you could still have problems. If you aren't able to qualify for a mortgage when the lease ends, you won't get a refund of all the extra money you have spent.

Closing Thoughts on Rent to Own Homes

If your current income isn't enough to qualify for a home loan, the option to buy your rental might look attractive. The risks to your finances are significant, however, with no guarantee that you will be able to or want to buy the home when the time comes. This will lead to you losing the extra money you thought you were investing in a home.

You also put yourself at risk from a landlord ripping you off. The contract will likely be weighed in favor of the owner, with many ways to void the contract. If the home goes into foreclosure, you will also lose your money.

Overall, you may be better off with a standard rental agreement, and put any extra money you have into a savings account for a future downpayment. Hopefully, you now have a better understanding of all the cons to rent to own properties.

Other Outstanding Active Rain Real Estate Content

Get more helpful real estate tips and advice in the previously published articles at Active Rain.

  • How much does it cost to move - one of the most significant expenses, when you are buying or selling a home, is the move. Get a firm understanding of what you can expect to pay for moving costs.
  • What are the tax deductions when buying a house - one of the better financial perks of owning your own home vs. renting is the fact you will have tax deductions coming your way. Learn that they are in this helpful resource.

 

Posted by

Bill Gassett is a thirty-two year veteran to the real estate industry. He enjoys providing helpful information to buyers, sellers and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, National Association of Realtors, Inman News, Placester, RESAAS, Credit Sesame and others.

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Rainmaker
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Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Good afternoon Bill Gassett - there is certainly more cons than pros.  Disciplined saving while renting is better.

Jul 22, 2020 12:00 PM #1
Rainmaker
3,573,101
Richard Weeks
Dallas, TX
REALTOR®, Broker

Great information, thanks for sharing.  I hope you have a great day.

Jul 23, 2020 02:54 AM #2
Rainmaker
2,885,386
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

There are always those nagging restrictions with a rent to own until they really see that you’re serious, I find.

Aug 04, 2020 08:54 PM #3
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Bill Gassett

Metrowest Massachusetts Real Estate
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