The 8 Best Methods for Finding a Rent-to-Own Home
The typical homebuying process goes something like this: You save up your cash, get preapproved for a mortgage, and put an offer on a house that fits your budget. The offer is accepted, and after the closing period, you sign the loan, grab the keys, and move in.
But what if that sequence of events doesn’t work for everyone? Sometimes, you don’t have enough cash saved up for a down payment, or you’re between jobs and can’t qualify for a loan. Maybe there’s a divorce that hasn’t been settled yet, or another financial obstacle is in your way.
If that’s the case, there’s an alternative route to homeownership you may not have considered: finding a rent-to-own home. These arrangements, when structured properly, can bring a lot of benefits to both the buyer and seller.
However, it’s not always easy to uncover these opportunities by simply browsing real estate listings or driving through your dream neighborhood, and you have to be wary of unscrupulous sellers. We talked to expert agents experienced in the rent-to-own process to show you exactly where to look and what pitfalls to watch out for.
What is a rent-to-own home?
A rent-to-own home is an agreement that allows the renter to buy the home from the landlord after a specific lease period. With a rent-to-own contract, you’ll have to pay a lease option fee upfront. This is essentially a security deposit that ensures your right to purchase the property at the end of the lease. In some cases, this fee will be applied to the down payment at the end of the lease term. Lease option fees vary widely, typically ranging from 1% to 7% of the purchase price.
The purchase price of the home is locked in upfront to save any negotiation at the end of the lease. Rent payments will then include a rent premium, or the portion of monthly rent set aside in an escrow account to be applied toward the down payment. Because of the rent premium, however, it will look like you’re paying an above-market rate. This money will eventually come back to you in the form of a down payment, but if you choose not to exercise your option to buy, that money may be lost.
Let’s take a closer look at the two types of rent-to-own contracts:
Lease option
A lease-option contract is similar to a standard rental lease but includes an option to purchase the home at the end of the lease term. If you choose not to buy, you will lose the option fee and, depending on the terms of the contract, possibly the down payment and any equity in the property.
Lease purchase
A lease-purchase contract means that the buyer is obligated to buy the home at the end of the lease term. If the buyer decides to walk away or doesn’t qualify for a mortgage at the end of the lease, not only do they risk losing their deposit, down payment, and any equity, but they also may be left open to legal action since they broke the terms of the contract.
