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If you're on the fence and thinking about the Buy vs. Rent decision, so called "rent-to-own" deals may sound like the best of both worlds. Unfortunately, the exact opposite is often true. Learn more about these arrangements and whether or not it is right for you.

Renting to Own

  • What is Rent-to-Own?
    Rent-to-own (or lease-to-own as it's sometimes called) typically involves a renter paying a landlord an above-market monthly rent payment with a portion of that rent going towards the eventual down payment on the home's purchase.

    The renter pays a fee to the landlord/owner and sets a time frame for the lease, which is usually less than three years. In a typical arrangement, the selling price of the home is fixed for the term of the lease and the renter retains the right to decline purchasing the property when the lease has ended.

    These agreements can give homeowners an opportunity to move without selling at depressed prices, and they allow renters to save for a down payment while holding out for a more favorable lending climate down the road. These deals can be a great arrangement for both owners and renters/future owners.

    Benefits to the renter
    Perhaps the greatest benefit to signing a rent-to-own agreement is the fact that it forces you to save for a down payment on a house. A regular rental should cost you less each month, but many people don't have the discipline to put the extra money aside. It also helps you get accustomed to a higher monthly housing expense which is what you will have when you buy a home.

    Entering into this kind of agreement with seller also allows you to negotiate favorable terms for the purchase price, closing cost assistance, transfer of utilities, improvements and other concerns that first-time homebuyers have.

    Renting also allows you to test-drive the home for an extended period of time. After a year, you will know whether or not you really want to stay there.

    Finally, this arrangement allows a new home buyer additional time to improve their credit, get a pay raise or new job, and educate themselves more on the home buying and home maintenance process.

    One of the biggest problems with renting-to-own is that it limits your options. Depending on the structure of the deal you will either have to buy a home that's less desirable that others on the market or you will lose the fees paid to the owner and even the additional rent you paid that could have gone towards a down payment.

    Another major problem is that you may not qualify for a loan when it's time to buy the home. It's critical that you understand the strength of your credit, the amount of money you'll have for a down payment and how difficult it will be for you to get financing.

    Get it in writing
    Because of all the possible complications inherent to these deals, it is very important to have a contract that explicitly states all of the lease to own terms. This includes the lease period, purchase price, fees paid, down payment amount, extensions, refunds, and other concerns. Having a real estate lawyer review this agreement will be worth the cost.

    Evaluating rent-to-own deals
    If you think that a rent-to-own agreement is right for you, make sure you're not overpaying for the right to buy the home. The landlord should be willing to quote you a monthly cost both with and without the future ownership option. Compare the rent to similar homes for rent and homes for sale on to make sure that the price is fair.

    Other Buyers Guide Topics

    for the index articles on the buying versus renting.

    Other Web Info

    An article on the resurgence of rent to own from the Washington Post.

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