The Pros and Cons of

Rent To Own

Rent to own, also known as lease to purchase or lease-option, is an agreement between two parties—the tenant/buyer and the landlord/seller—wherein the tenant pays rent to the landlord with the understanding that a portion of their rental payments will go towards a down payment to eventually purchase the property. While this may sound like a great deal for tenants who are looking to become homeowners, there are some things to consider before signing on the dotted line.

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Pros of Rent to Own

1. You Get to Test Drive the House

When you buy a car, you take it for a test drive before committing, right? The same goes for houses. When you enter into a rent-to-own agreement, you essentially get to “test drive” the property for a designated period of time (usually 1-3 years) before making a final decision on whether or not to purchase it. This is beneficial because it gives you time to see if you like the neighborhood, the school district, if there are any hidden flaws with the property, etc.

2. You Get Time to Save Up for a Down Payment

The average down payment on a house is 20% of the total purchase price—that’s nearly $60,000 on a $300,000 home! For most people, saving up that kind of money can take years. With rent to own, you can spread out your down payment over the length of your lease which makes it more manageable. And even better—a portion of your monthly rent payments will go towards your down payment!

3. You Can Lock in Today’s Price

In today’s market, prices are rising at record speeds. In fact, according to Realtor.com®, “Home prices have risen more than 30% since early 2012 and show no sign of slowing down anytime soon.” If you enter into a rent-to-own agreement now, you can lock in today’s prices which gives you some protection against inflation.

Cons of Rent to Own

1. You May End Up Paying More in the Long Run

While it may be tempting to choose rent to own in order to avoid paying private mortgage insurance (PMI), doing so may not always be in your best interest financially. In general, when you finance a home purchase with less than 20% down, your lender will require you to pay PMI which protects them in case you default on your loan—but it adds an additional monthly cost onto your mortgage payment. However, depending on how high PMI is and how much extra you’re paying in rent each month with rent-to-own vs. taking out a conventional mortgage loan, you could end up paying more money overall by choosing rent-to-own.

2. The Seller Could Back Out of the Deal at Any Time

Before entering into any legal agreement, it’s important that both parties fully understand and agree upon all terms and conditions set forth in said agreement—and that includes a rent-to-own contract/agreement. Unfortunately, there have been cases where unscrupulous sellers have taken advantage of naïve buyers by backing out of their agreed-upon terms at the last minute or refusing to sell altogether once the agreed lease term has ended even though the buyer has fulfilled their obligations (i.e., timely rental payments plus any additional option fees). Before signing anything, make sure that everything is spelled out clearly in black and white including what will happen if either party decides they no longer want to move forward with the deal as originally agreed upon so there are no surprises later down the road.

Whether or not rent-to-own is right for you ultimately depends on your unique circumstances but hopefully this blog post has given you something new to think about! If after reading this post you decide that entering into a rent-to-own agreement is something that interests you, be sure to conduct additional research and consult with an experienced real estate agent or lawyer who can help guide you through each step of the process ensuring that everything goes smoothly from start to finish!