How Does Rent to Own Work: A Helpful Guide for Beginners

how does rent to own work renting home vs owning house rental

Becoming a homeowner is a dream for most people. However, many individuals face the obstacle of not being able to afford their own home. Plus, according to studies, 63% of millennials regret buying a house because of hidden costs and the responsibility of maintenance.

But those numbers don't just apply to millennials, buyer's remorse can happen to anyone of any age. But with skyrocketing apartment rent prices and unaffordable homeownership, it leaves many people considering the rent-to-own option.

If that's you and you're wondering, "How does rent to own work?", take a look at the information in this guide to learn more.


What Is Renting to Own?

Renting to own allows you to buy a house through a rent-to-own agreement. The contract lets you rent a property for a certain amount of time before obtaining ownership. The length of time could be a few months to several years, depending on the terms of the contract.

Either a company or an independent seller has the option to rent a house to a prospective buyer, but the process differs from the normal home buying process.

The two types of rent-to-own agreements are a lease-purchase agreement or a lease option agreement. A lease option agreement gives you the choice to purchase the home after the agreed time frame.

On the other hand, a lease-purchase agreement means you are legally obligated to purchase the house. 


How Does Rent to Own Work?

The rent to own process varies due to different contract agreements, but most of them are generally the same. They'll consist of the following:

Rent

You'll pay rent in a rent to own situation. Obviously, because the home isn't yours yet, and there is no mortgage. You'll agree on a certain amount with the seller on how much you'll pay each month. A portion of your payments goes towards the purchase of the home.

Maintenance

Maintenance is another component of renting to own that differs. Some landlords will agree to cover maintenance costs, while others will hold you liable. You may have to pay property taxes, HOA fees, landscaping, and the cost of repairs.

Lease Term

You and the seller will decide on a lease term in the agreement. Once that time is up, you'll either decide to purchase or not. In the event that you cannot qualify for financing, the purchase option will no longer be on the table.

Purchase Price

The purchase price for the house is based on the home's current value. The price will be solidified when the buyer and seller sign the contract. The price might also be set once the lease expires.

Option Money

You must pay the seller a one-time, non-refundable fee. This fee allows you to buy the home and sometimes the seller will apply the amount towards the equity in the home.

There's no set option money price. It's usually the percentage of the home's purchase price.

Closing

If you decide to purchase, you'll need to secure financing at the end of the lease. The lender will set the closing date so you can begin ownership of the property.

Depending on the terms of the contract, a portion of the rent money that was set aside will be will then be credited to you.

Keep in mind that the rent to own process is negotiable. It's best to consult with a real estate agent who can help you with the process.


Renting to Own Pros and Cons

There are pros the cons to everything, and renting to own is no exception. However, there are many benefits to renting to own. You don't have to qualify for mortgage upfront, which gives you time to get your finances together.

Also, you can accumulate a down payment slowly, instead of handing over a large amount when you first move in.

Lastly, there's no competition. Once you get in the home and start renting, there is no bidding war between you and other prospective buyers.

On the contrary, rent is more expensive for this type of scenario and you'll have to pay non-refundable option money. That's a problem if you decide against the home later down the line. 

It's also costly to pay for repairs and maintenance on a house that doesn't belong to you. Furthermore, the home's value could go up or down while you're renting.

Therefore the purchase price that you lock in during the contract will most likely be inflated in case the value rises. But that also means you might pay more for a property that's worth less than what you paid.


Is Renting to Own Worth It?

For some people, renting to own is absolutely worth it. It's not for everyone, but it is for the right candidate. If you're someone who wants to be a homeowner, but you're not ready financially, then this is a wonderful option.

Lease agreements allow you time to organize your finances, enhance your credit score, and save money for a down payment.

Not to mention, it lets you secure the house you'd like to own. If your rent payments accumulate towards the purchase price, it also helps to build home equity.


Get Your Dream Home on Your Own Terms

It would be nice if everyone could buy a home the traditional way and afford to pay a large down payment, but that's not always the case. But taking smart, concise financial steps towards the home of your dreams is just as effective. Do what's best for you, and you won't regret your decision.

So, how does rent to own work? Hopefully, this article helps you understand the house rental vs home ownership process. If you are interested in learning more about real estate, feel free to browse through the rest of our blog. We have a wide variety of home ownership and property management articles for all levels.

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