Buyer Benefits and Downsides of a ‘Rent-to-Own’ Home Purchase

A rent-to-own or rent with the intent to buy type real estate deal can bring with it some distinct advantages for a buyer, but not all that glitters may be gold in such deals.

For a buyer, it can be hard to ignore the availability of rentals and homes on the market that owners might be willing to rent in our current real estate environment. And with buyers still having the upper hand in most areas of the country, renting with an intent to buy might seem like a great idea in order to feel out a particular house or a neighborhood before settling down (we had several such offers during the time that our home was on the market); however, there may be a few considerations to take into account before jumping on this bandwagon.

BENEFITS

You Can Settle In

Renting-to-own means you might be able to settle in a little bit more than when you’re just renting. With a plan in place to allow you to hopefully accept ownership of the property you’re renting in a certain amount of time, you may be able to make a house a little bit more of a home than you would as only a renter. You may even be able to convince the owner to start letting you choose paint colors and making other adjustments to the home that will benefit you in the future and make this place your own.

Lack of Competition

At least when you’re renting-to-own, you can hopefully keep the competition at bay. If you have a legally binding contact with the home seller to rent with the intent to buy, the likelihood that someone is going to sneak in and steal the home out from under you while you’re “just renting” or still considered to be “out looking” for other homes, may be significantly reduced.

Learn the Property or Abort — Abort!

While you’re renting-to-own, you could be blessed with the opportunity to learn more about the property that you are considering buying, even more so than what a general home inspection might tell you. This could give you a leg up when it comes time to close the deal and may even enable you to ask for a few more things to be fixed before closing. If nothing else, you could learn about issues or potential issues such as home problems, a bad neighbor or neighborhood or possibly have a chance to bail should a job loss or change of job occur during the time in which you are renting.

Putting Money Toward a Home

It could depend upon the way your contract is drawn up, but a portion of the rent that you are paying might go toward earnest money, which in turn could be put toward a down payment. This is kind of like pulling double duty. Not only are you renting, but you’re putting money toward your future home at the same time.

DOWNSIDES

You’re Locked In

You may have put down a sizeable amount in earnest money and signed a legally binding contract of your intent to purchase the home you are renting at a predetermined date. In the mean time, there are all kinds of situations — job loss, health problems, family issues, etc. — that could affect your ability or desire to remain in the home. While you might be able to get out of the contract, it could be costly with the loss of earnest money and possibly legal fees included in your expenses.

Higher Rent

While in many cases renting a home might be costlier than renting an apartment, when you are renting-to-own, you might find your monthly payments are higher than they would have been under a typical renting scenario. Some of your payment might be going toward earnest money, and this could put a heavier financial strain upon you and your family.

Unforeseen Foreclosure

Just because you are making your monthly payment to the current property owner, this doesn’t necessarily mean that he is returning the favor. He may be collecting your payments but failing to meet his own mortgage obligations. This type of scenario could result in you being left with a real problem on your hands, as his failure to pay could leave you in a home that is being foreclosed upon. Such a situation could end in a legal tangle, with you being asked to leave the property and maybe not even landing you the house you had planned on living in.

You’re Still Renting

Even though there are certain advantages to renting-to-own or renting with an intent to purchase, the fact remains that you are still renting. You’re not likely going to gain much upon mortgage principal or be able to make many of the modifications to the home that you might desire until you are the official owner. Until you’ve signed on the multitude of dotted lines on closing day, that house still isn’t yours.

More From This Contributor:

Valuable Financial Lessons From Mom and Dad

What Financial Freedom Means to Me

How One Page Simplified My Financial Life

Disclaimer:

The author is not a licensed financial, legal or real estate professional. The information provided in this article is for informational purposes only and does not constitute legal, real estate or financial advice. For such advice, readers should consult a licensed financial advisor, lawyer or realtor. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.