Maybe youve seen ads on places like Zillow and Craigslist for rent-to-own homes.
But rent-to-own homes have more cons than pros.
You could be on the hook for repair and upkeep on a home you dont even own.
Sometimes renting makes sense. Here are10 things you should rent instead of buy.
Heres everything you should probably know.
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What Is A Rent-to-Own Home?
Rent-to-own, a lease-option agreement, or lease-to-own: It goes by different names but describes the same thing.
How Does Rent-to-Own Work?
Heres how the rent-to-own process usually works:
Did you know?
When youre renting, the title of ownership belongs to the rent-to-own company.
The fee can range anywhere from 1% to 5% of the purchase price.
(It may be applied to your down payment if you decide to buy the home later.)
Some landlords may also require first and last months rent before you move in.
The agreement can either give you the option to buy oran obligationto buy after a certain time.
Its really important to know the difference.
Whos the Target Audience for Rent-to-Own Homes?
Renting to own is targeted to people who may struggle to purchase a home otherwise.
Here are the drawbacks you should know about.
You Dont Own the Home
These programs arent the same as buying your own home.
Its a much more complicated agreement.
Like anything complex, the devil is in the details.
Part of your monthly payments are still rent money, which goes into your landlords pocket.
This makes rent-to-own homes oftenmoreexpensive than renting a traditional home in the same area at fair market value.
Theres also no guarantee that youll get approved for a mortgage before your lease expires.
You may also be on the hook for property taxes and HOA fees.
These additional costs make it more difficult tosave for a mortgage down paymentbefore your lease is up.
Hidden Terms
Rent-to-own contract terms almost always favor the owner, not the renter.
One late payment, for example, could cancel the deal.
What Happens If You Walk Away
Another downside?
The company could even keep the portion of your monthly payments intended for a future down payment.
If you entered into a lease-purchase agreement things can get really messy.
But the truth is, theres a lot of expenses, and few rent-to-own agreements end in homeownership.
In short, less than half of people who enter these agreements end up buying a home.
Those arent great odds.
Heres what to watch out for when considering a rent-to-own home.
Ask the owner these questions if theyre not clearly stated in the contracts:
2.
Understand the Homes Purchase Price
Many rent-to-own agreements state the home purchase price up front.
After all, the money you paid as a renter will likely only cover part of a down payment.
To qualify for a 10% mortgage down payment, youll need $27,500.
Your initial deposit or option fee might get credited to your down payment, which can help.
But again, this all depends on the details of your specific rent-to-own agreement.
Before you sign, be realistic about how large of a monthly payment you’re free to afford.
And verify you understand how large the down payment will be when it comes time to purchase the property.
Talk to a Real Estate Agent or Attorney
Rent-to-own agreements are dense and complicated.
Youll need help from an independent real estate agent or an attorney to understand your rights and responsibilities.
Research the Property and the Seller
Rent-to-own homes are often marketed as fixer-uppers.
Even if the house seems in good shape, do your due diligence.
Look into the company that owns the home, too.
Does it have a good track record of converting renters to owners?
Or is it nearly impossible to find information about the owner?
If its the latter, thats a huge red flag.
you could look up property records on your countys clerk of courts or appraisers website.
see to it the current owner is the person or company youre signing a contract with.
But its not your only option.
Here are some alternatives to rent-to-own homes:
Buying a home is a great way to build wealth.
But entering a rent-to-own agreement can turn your homeownership dreams into a nightmare.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
She focuses on retirement, credit scores, investing and life insurance.
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