A rent-to-own home purchase can be a good deal for both buyer and seller.
A rent-to-own contract, also known as lease-to-own, is essentially a rental lease in which the tenant has the option to purchase a property at a predetermined time. Rent-to-own contracts are particularly popular during economic downturns, when consumers have trouble getting loans. A rent-to-own contract is a good way to build equity in a home without having to go through a bank.
Rent-to-own home contracts are also known as lease options, lease purchases, owner financing and land contracts. They aren’t all the same thing, but they are commonly mistaken for each other. A lease option is a contract in which a tenant has the option to buy the property they are leasing after a certain time. It is the same as a rent-to-own contract. A lease purchase is not an option to purchase on the part of a tenant, but an obligation. Contingencies such as an improvement in credit score or a certain savings amount may be put in the contract, negating it if they are not met. Owner financing or a land contract is a purchase by a buyer from an independent seller. The seller finances the purchase for a certain time, after which the mortgage is either paid off or a balloon payment for the balance is drawn up.
A tenant who enters into a rent-to-own contract receives several benefits, including the ability to move into their new home without a significant down payment. Tenants can also work on the home they eventually plan to own (within the specifications of the lease) and put additional money in their monthly rent payment that will eventually be used toward the purchase of the home. Banks generally look more favorably at those who have lived in a home, with the intent to purchase, because it shows a record of payments as well as a commitment to the property.
Benefits to the seller include the ability to get out from underneath a mortgage payment each month, or to receive income if the home is owned outright. Sellers also no longer have to maintain the property since most rent-to-own contracts put that responsibility on the buyer.
While a rent-to-own contract seems like a great deal for everyone involved, there are some disadvantages that need to be considered. If a renter decides at the end of the lease term not to buy the property, the seller has to try to sell the property again, costing him time and money. For renters, if there are provisions in the contract that allow the seller to kill the deal based on poor property maintenance, late payments or other clauses, a renter will lose all the rent he paid, plus maintenance he did as well as any down payment that was collected.
According to Anthony Sanders, a finance professor at Arizona State University, anyone considering a rent-to-own contract should keep the rent and purchase aspects separate. “Renters who want this option should go with a reputable broker and a good real estate attorney,” Sanders said. “The incentive for the owner to cancel the option if house prices increase quickly is tremendous.”