Learning About Real Estate Listings and Agent Services

What To Know About Rent-To-Own Home Deals

by Elaine Ryan

It sounds almost too good to be true, and many rent-to-own home deals are just that. You might be able to find a great home and put your rent money to good use or you might end up making a bad decision. Read on to learn the pitfalls to watch out for when you rent to own.

How the Process Works

You need to rent or lease a place to live anyway, so why not try a rent-to-own home? Typically, you agree to rent a home for a given period of time – often it's three years. The agreement should specify the amount of the rent payment, the length of the lease period, the price of the home if you buy it, and more. Also present in the agreement is the percentage of the rent charged that will go toward the down payment on the home.

Be Aware of These Issues with Rent-to-own Deals

1. Option Fees – This fee is meant to serve as a "good faith" fee paid by the buyer. The amount of the fee is negotiable and usually ranges from about 2.5 to 7% of the purchase price of the home. It may be termed as an option consideration or option money on your contract. Often, the money for the option fee is deducted from the down payment.

2. Higher Rents – In most cases, you won't be getting a bargain on the cost of the monthly rent with a rent-to-own deal. Usually, about 20% of the monthly rent amount goes toward the down payment amount. While the rent may be above what the average is for the area, it can present those who have trouble saving money with a solution to save up a down payment. In some cases, your lease period will end and you still won't have quite enough to pay the down payment. If that happens, you will need to make arrangements to meet the requirement. Be sure to know about what is expected of you after your lease period.

3. You Renege on the Deal – It can be difficult to foresee the future, but if you end up being unable to complete the deal you might lose money. Be sure you know the consequences of moving out before you've completed the lease period. For example, what happens if you lose your job and have to move to a less-expensive home? Do you lose the down-payment money?

4. You Must Have Lending Lined-up – Most who enter into these types of agreement do so in an effort to spend three years rebuilding their credit while saving up the down payment. Unfortunately, you must have lending available at the end to complete the deal. Depending on your credit situation, you might be better off without a commitment that involves so much to lose if things don't go your way.

If you are seriously considering a rent-to-own deal, let your real estate agent know about it. They can suggest this option to sellers who might be interested.