The first hurdle in home ownership is the down payment; the next is the ability to service a mortgage and the size of the mortgage determines the ability to pay. The size of the mortgage is determined by the cost of a home. Any one of these factors can become the Achilles heal to home ownership.
Anything that gets people into homes is a noble cause but "Rent to Own" is a pathetic effort to bridge these failings.
I would never recommend this process to any of my seller clients.
A Typical Rent to Own Scenario.
The Rent to Own process is one that hibernates in hot markets and returns when markets are slow.
The buyer and seller agree on a price for the home. The price is usually based on a present day value ($350,000). They must also agree on a deposit ($5000) and a time frame within which the deal must complete (18 months). The buyer agrees to rent the home for $1500 per month for the period of 18 months. At the end of the 18 month period the buyer must close the deal and pay the seller in full.
Two cases spring to mind:
The market falls and property prices flat line or drop.
At the end of the period the buyer decides to walk or renegotiate the deal because the original purchase price ($350,000) is higher than the present asking price of comparable property ($330,000). This is going to result in $20,000 of negative equity which the bank will not finance. Consequently the buyer will be required to find an extra $20,000 in cash.
Well it's not going to happen because the buyer got into this deal precisely because they had no down payment.
The buyer wins the gamble and walks away from the $5000 deposit, if it is that large. The seller pays the mortgage, taxes and insurance for 18 months and gets to either renegotiates a lower selling price or keep the deposit to restore the house.
The market rises and the property price rise.
The seller carries the property for period (18 months) and the buyer closes the deal because the original price makes it a steal. After the period they probably get 100% financing.
The seller pays the mortgage, taxes and insurance for 18 months. Again the seller is the looser.
RE Solution: Hold the property and rent it for $1500 a month. Pay all the running costs and try to sell it when things improve.