What Is A Rent-To-Own Home And How Does That Process Work


If you’re thinking of buying a property in the next few years, but aren’t quite ready to make a move, you may want consider looking into a rent-to-own property. Below is an explanation of what rent-to-own homes are, how the process works, and tips to make one of these agreements work for you.

What is a rent-to-own property?

As the name suggests, a rent-to-own property is a home that you agree to rent for a certain amount of time before you’re given the option to buy it outright. Though, the specific terms of each contract may differ, typically once the you are ready to purchase the house, a portion of your previous rent payments may be put towards your down payment.

If this scenario sounds too good to be true, unfortunately, it typically is. Few landlords want to take the risk of having their tenant end up deciding not to buy the home, so this type of agreement is usually only seen in down markets, or areas where it may be hard to fill a rental without giving a tenant some extra incentive.

How the contract works: Lease option vs. lease purchase agreements

However, if you are lucky enough to land on one of these agreements, it’s important to understand how the contract will work. First, in addition to your security deposit and first month’s rent, you’ll usually be faced with another upfront fee called an “option fee”. This is a fee that you pay for the privilege of being given the option to buy the home at the end of your lease and it’s typically non-refundable.

Then, there are two distinct parts of the rent-to-own contract that you need to consider. There’s the rental agreement, which will outline the terms that you need to abide by while renting, just like any other lease. In addition, there is the purchase agreement, which will outline the terms under which you agree to eventually buy the home.

Finally, there are also two types of rent-to-own agreements that you need to know about. There’s a “lease option agreement” and a “lease purchase agreement”. From a buyer standpoint a lease option agreement is generally preferred because it gives you the option to buy the home at the end of your lease. Whereas a lease purchase agreement contractually obligates you to buy the home.

Why someone might choose a rent-to-own property

From a buyer standpoint, it can be easy to see why someone would want to use a rent-to-own agreement. For one, it effectively gives you a chance to test drive the property that you intend to buy. For another, it gives you more time to get your financials together before you head to the settlement table and there could be some assistance with your down payment.

From the seller’s perspective, the reasons are less clear. However, as was pointed out above, it could be the incentive needed to get a tenant in the door during a slow market. If you’ve been thinking of selling soon anyway, it could be an effective way to take care of two birds with one stone.

Tips for making a rent-to-own agreement work

If you’re looking into leasing and eventually buying a rent-to-own property, here are some tips that you can follow to make sure it works out in your favor:

  • Hire professional help: Like any type of legal agreement, you should only enter into a rent-to-own agreement if you have professional help on your side. Hire a real estate agent or real estate attorney to help you handle the paperwork.
  • Opt for a lease option agreement: Even if you’re sure that you’ll want to buy the house at the end of your lease, you never know what will happen in the future. A lease option agreement will give you the flexibility to make the move that works best for you.



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