34% of home renters in the US can’t afford to own a home. Because of increasing mortgage rates and low income, rent-to-own homes have become popular.
Almost 50% of the people who rent in the US are millennials. As home prices are steadily increasing, millennials are opting for rent-to-own homes. It also allows you to purchase your dream home at the end of your lease.
📈 Rent-To-Own Homes on the Rise
- The US rent-to-own market is projected to grow at a CAGR of 6.77% and is expected to reach $15.53 billion by 2027.
- 79% of Americans consider a rent-to-own agreement to purchase a home.
- 50% of people choose rent-to-own to be able to buy without strong credit or to save on down payments.
What Is Rent-To-Own?
Buying a home requires a mortgage down payment of 14%. If you buy a $400,000 house, you would have to pay a down payment of $56,000. This is a huge amount to save at low-income wages.
However, you can achieve your American dream of home ownership with rent-to-own. You can pay rent along with a small deposit (option fee). At the end of your lease, you can purchase the home.
How Does Rent-To-Own Work?
When you sign a rent-to-own contract, you become eligible to purchase the house in the future. The owner of the property will add a section of your rent towards the down payment of the house.
Therefore at the end of your lease, you have an amount secured. After the down payment, you can get a mortgage and purchase the home. Rent-to-own appeals to those who find problems with traditional homebuying.
With these simple steps, you can buy rent-to-own homes with low monthly payments:
- Search for a House: You first need to search for properties for rent-to-own in your desired location.
- Agree on the Purchase Price: You and the seller need to agree on the home’s final purchase price.
- Pay the Option Fee: You’ll need an upfront non-refundable option fee. It’s like a mini down payment to secure your right to buy the house. The fee typically ranges from 2% – 7% of the purchase price.
- Review and Sign the Agreement: Draft a contract that lays out all the rules and terms of the deal. Read the seller’s terms carefully and if satisfactory, sign the agreement.
- Start to Pay Rent: When you pay your monthly rent, some amount goes toward the eventual down payment of the house.
- Maintain the House: You’ll need to fix broken items and keep the property in good shape.
- Purchase the Property: You can buy the house if you get a pre-approval for a mortgage at the end or during your lease.
Types of Rent-To-Own Homes Contracts
Rent-to-own can either be a lease option or a lease purchase. Let’s look at their differences:
| # | Lease Option | Lease Purchase |
|---|---|---|
| Definition | You have the option to buy the house at the end of the rental period. | You are obligated to buy the house at the end of the rental period. |
| Upfront Fees | You pay a nonrefundable upfront fee, usually higher than a lease purchase. | The upfront fee is lower because you’re committed to buying. |
| Purchase Price | The final purchase price is agreed upon upfront at the time of the contract. | The final purchase price is higher, as its market value is set in the future. |
What Should You Know Before You Sign the Contract?
Here’s how you can prevent landing into legal difficulties:
- Get a Real Estate Attorney’s Help: You can consult with a real estate agent or a lawyer. They can make sure the rent-to-own terms favor you.
- Research the Home: Find out everything about your house for rent-to-own. Check if it’s in good condition or if it’s located in a safe neighborhood.
- Research the Seller: You must research the details about your seller. You can also consult your neighbors for it.
- Choose the Right Terms: Talk to the seller about your plans and goals. You can negotiate the rental period with the seller if you need time to save for a down payment.
Pros and Cons of Rent-To-Own Properties
Here are some pros and cons of rent-to-own properties. These points can help you make a better decision towards rent-to-own purchase.
Pros:
- Save Your Down Payment: Rent-to-own lets you build a down payment while trying out the home. Expect higher rent to cover this benefit.
- Share Repair Costs: Agreements often split repair costs with the seller. You might fix minor issues, while they handle major ones.
- Buy or Walk Away: At the lease end, you can choose to buy the house with a mortgage or simply move out. Any saved rent goes towards the down payment if you buy.
Cons:
- Lose Money Upfront: If you break your rent-to-own contract, you might lose your deposit. You can also face legal trouble from the owner.
- Might Pay More in Rent: Rent-to-own costs more than regular rent because some go toward the down payment.
- Deal With Strict Payment Terms: Missing rent payments could cost you the house and your invested money.
- Can Overpay for the House: As the contract will be signed beforehand, you lock in on the home price. If home values drop, you might be stuck buying an overpriced house.
How Can You Spot Rent-To-Own Scams?
Before you sign a rent-to-own agreement, it’s important to conduct your research. Start by comparing market rent prices. Since rent-to-own typically costs more, you’ll want to ensure the extra expense is justified.
Next, investigate the seller and the property. Verify they legally own the house and are current on payments. A home appraisal will determine you’re not overpaying for the home. Finally, don’t skip a home inspection to uncover any hidden issues like foundation problems or hazardous materials.
Bottom Line
Rent-to-own can be a good idea if you’re working on your credit score, need time to save for a down payment, or want to lock in a purchase price. However, it might not work if you’re facing financial challenges or are unsure about your plans.
Before you commit to a rent-to-own contract, it’s crucial to get professional advice and research the property, contract, and seller. Ensure the terms align with your goals.
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Frequently Asked Questions
What's the difference between rent-to-own and mortgage?
They differ as rent-to-own offers flexibility but higher costs, whereas a mortgage is homeownership with long-term loan payments. The other is that a home for rent-to-own involves renting a property with the option to buy later, while a mortgage is a loan used to purchase a home.
What are some disadvantages of the rent-to-own model?
The biggest disadvantage of the rent-to-own is the risk of losing money if you don't end up buying the home. Some other cons include higher than average upfront fees, potentially higher overall costs, and limited property choices.
Which is more economical, renting or owning a home?
It depends on various factors, such as location and housing market conditions. In US buying a home is cheaper as compared to renting.
What are the best rental websites in the US?
Popular rental sites include Zillow rental manager, Apartments.com, and HotPads.com.
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