$306,000. This is the median cost of a home in the United States in 2021.
Do you have this kind of money sitting around? If you’re like most Americans, buying a house in cash is out of the question. With most American workers living paycheck to paycheck, it’s easy to see why affording a home can be challenging.
However, just because you can’t splurge cash money on a house doesn’t mean you can’t become a homeowner. Mortgages enable most people to buy homes, but there is also the rent-to-own solution.
In this article, our focus is on rent-to-own homes. Continued reading to learn the pros and cons of this option.
Let’s get into it!
How Does Rent-to-Own Work?
Before we dive into the ups and pitfalls of renting to own homes, it’s important to flesh out how to arrangement works.
Just as the name connotates, rent-to-own means you’ll rent a home but with the option or ability to buy it at a later specified date, and at a specified price. Contract terms and conditions can vary from seller to seller, but that’s the short of it.
For deeper insight, learn how rent to own homes work here.
Rent-to-Own Is Ideal for People with Unattractive Credit
One of the requirements for getting a traditional mortgage is having good credit. Lenders will typically state the minimum credit scores applicants should have.
It’s possible to get a mortgage with bad credit, but this won’t be from the traditional home loan market. There are private companies that offer home loans, but they don’t offer significant benefits over traditional home loans. In fact, most people would rather keep renting instead of taking out bad credit home loans.
Rent-to-own homes offer people with bad or poor credit an easier path to homeownership. Since these homes are typically offered by real estate developers instead of bankers, they have greater wiggle room when it comes to credit. As long as you can afford to make the payments, you’ll easily qualify for a rent-to-own program.
The sellers of the property have little to lose if you default on payment. You’re still technically a tenant, so reclaiming the home isn’t as complicated as pursuing a foreclosure.
So, don’t let your bad credit stop you from owning a home. A rent-to-own agreement gives your time to rebuild your credit, such that you might be able to qualify for a loan when it’s time to buy the home.
You Lock-in a Purchase Price
Prices in the real estate market are always moving – slowly, but moving.
However, over a long period of time, like 5 or 10 years, price changes can be significant. A house that was going for $300,000 in 2021 can go for $500,000 in 2025. It can also lose value and cost much less, as was the case during the Financial Crisis of 2008.
This price uncertainty isn’t ideal when you’re buying a home. If a little bird tells you that home prices will be much lower in the next five years, you’ll sit tight and wait for the price drop. But if the drop doesn’t happen and prices go up instead, you’ll be left ruing your decision.
With rent-to-own agreements, the uncertainty doesn’t exist. This is because you get to lock in the purchase. If the agreement says that you’ll buy the home in 10 years’ time at $500,000, that will be the purchase price.
Homeownership Test Drive
Getting into a rent-to-own agreement is really like having all the time you need to test drive a car and decide whether it’s good for you.
But unlike owning a car, the stakes are higher in owning a home. Make the wrong purchase and you’ll feel like you threw a fortune down the drain. Renting to own enables you to test-drive homeownership. You’ll be able to establish whether you not only like the house, but also the neighborhood.
If you don’t, you can get out of the agreement, although you’ll lose the money you had paid upfront. This loss, though, can’t be compared to buying a bad home you don’t like.
You Forfeit Money If You Don’t Honor the Rent-to-Own Agreement
When you enter into a rent-to-own agreement, you’ll make earnest payment upfront. This is usually about 5 percent of the agreed purchase price. So, if the home’s purchase price is $500,000, you’ll make a $25,000 deposit. In addition, you’ll be paying rent as agreed.
If you want to walk out of the agreement or the time to purchase the home has come and you aren’t ready to buy, you’ll lose the earnest money. A lot will also depend on whether you were on a lease option or lease-purchase.
Little Control Over the Property
In a rent-to-own agreement, you’re technically a tenant until you’ve fully purchased the home. Until then, you’ll have limited control over the property.
For example, you might not be able to stop the landlord (owner/developer) from using the property as collateral in a loan application. If they built or bought it via a mortgage, the property could be foreclosed if they default on the mortgage. A failure to pay property taxes will also see liens placed on the property.
This isn’t an ideal situation to be in, especially because entering into a rent-to-own agreement involves a big financial commitment.
Falling Home Prices
Real estate typically appreciates but it’s not uncommon for home values to fall. If prices are falling substantially and you’ve already locked in a purchase price in a rent-to-own agreement, you’ll feel like you’ve made the wrong decision. If only you could have waited, you would have been snapped up a house at a lower cost!
Rent-to-Own: Does It Work for You?
Rent-to-own is ideal for people who really want to buy homes but have bad credit or, for whatever other reasons, aren’t ready to buy immediately. However, the arrangement isn’t without its drawbacks. You have little control over the property and you forfeit your money in the event that you’re unable to buy when the lease expires.
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