Everything You Wanted To Know About Rent-To-Own Real Estate

While searching on the internet for homes to purchase or rent, you may have run across advertisements with insanely low monthy payments and the tern rent-to-own. But what does it really mean?

Rent-to-Own is also called lease purchase or option to buy. I receive numerous calls on this question because it sounds like an easy way to purchase a home.

Most people think they will rent a house and then all the rental money goes toward their down payment and closing costs and in a year they will have their own home.  They are nearly always disappointed when I explain the real world to them.

This is how it works:

The tenant is buying the right to purchase the house at a later date for a given price.

They then makes a down payment — it's negotiable, but usually one or two months’ rent).  Monthly payments are established and may be higher than the market rent. 

A portion of the monthly rent goes toward the option to purchase.  For instance if you pay $1,800 per month and the market rent is $1,500, then $300 will go towards your down payment when you exercise your option to buy. 

You could write your lease for any number of years, whatever you and the owner agree to sign.  That would be your option period. 

Next, the tenant signs a contract with the owner, which is similar to a regular lease, but containing an option clause which sets out in writing what happens if you don’t exercise your option at the end of the term. 

Many times if you decide not to purchase, then all the extra rent and the down payment will go to the owner. That makes the lease purchase a win for the owner.  The upside for the renter is that you lock in your price and it remains locked in until the end of the option. 

So, if the real estate market takes off, your price remains at the lower price. It is also an advantage for the renter that they establish payments for that period of time which makes getting a loan easier.

A rent-to-own could be a very good way to transition into your own home. But before signing any rent-to-own agreement have a real estate attorney look over your contract and advise you.

The pitfalls:

The buyer finds the house or neighborhood undesirable after living there for awhile and loses his option money.

If the buyer does not maintain the property, loses their job, or just can’t pay and the seller has left town and can’t come back to make repairs or doesn’t have the money to carry the mortgage, the tenant may get foreclosed on and ruin their once pristine credit.