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Saving the down payment to buy your own home is hard. Just when you think you’re getting there, home prices rise – and you need to save even harder. You’re in a cycle of never-ending saving.
According to Zillow, the average home price in the United States is $243,225 (November 2019). This means you’ll need to find more than $17,000 as a down payment – and this is based on the average down payment of 7% of the purchase price (NerdWallet, September 2019). Zillow predicts that house prices will rise by 2.2% over the next 12 months – your dream home is galloping away over the horizon.
There is another way to own your own home. A rent to own home could be the answer to your homeowning dream. Let me explain how it works, and all you need to know before you sign contracts on a rent to own home.
What Is a Rent to Own Home?
When you rent to own a home, you rent your home for a period agreed with you landlord – as you would with an ordinary rental agreement. However, as part of the agreement, you agree to buy the home at or by the end of your rental period for a known price. While you are renting, part of your rental payment goes toward the agreed sale price of the home.
How Do Rent to Own Homes Work?
You want to get on the property ladder, but as home prices keep rising just as rapidly as the cost of living, it is getting increasingly hard to save a down payment. The money you spend on rent is lining your landlord’s pocket, when it could be helping to build you wealth through homeownership.
According to a Joint Center for Housing Studies of Harvard University study, those who went from renting to owning between 1999 and 2013 enjoyed a median gain in household wealth of $85,400.
You can move from renting to owning faster with a rent to own home. Here’s how it works:
- You commit to renting the home for a specific period. Usually this is between one and five years. During this time, you are the tenant of the landlord, and your obligations as a tenant remain.
- However, as part of the rental agreement you have an agreement to buy the home at the end of the rental period. Some rent to own home contracts may let you buy the home earlier.
- The rent to own home agreement will state the purchase price, or detail how the purchase price will be determined at the end of the lease. Most rent to own home buyers prefer to lock in the purchase price at the start of the agreement.
- While you are renting, part of your rental payment goes toward the purchase price. This effectively acts as your down payment when you come to purchase the home – though it also means you will pay a higher rent.
- As part of the rent to own home contract, you usually pay upfront and non-fundable fees.
- The agreement will lay down the landlord and tenant responsibilities – this may include that you are responsible for maintenance and repairs during the lease, instead of the landlord.
You should ensure that you understand your maintenance and repair obligations. There is a big difference between decorating and mowing the lawn and replacing a leaking roof.
You must also ensure that you understand which type of rent to own home contract you are signing. There are two types of rent to own home agreements:
A lease option contract gives you the right to buy the home when the lease expires. However, you don’t have to. If you decide for whatever reason not to buy the home, you can ‘walk away’ from the agreement. You will, of course, lose your non-refundable fees, and the extra rent you’d have paid toward the purchase price will not be returned either.
A lease purchase contract means you are legally obligated to buy the home when the lease expires. This obligation is irrespective of whether the home has decreased in value and could also mean you are forced to buy the home even if you cannot afford to do so.
Rent to Own Home Pros and Cons
Before entering into a rent to own home agreement, you will want to assess if it is right for you. Here are the pros and cons of rent to own homes.
Good for those with no credit
If you have no credit or bad credit, the rent to own agreement gives you time to rebuild you credit score. This will make it easier to get a mortgage when the rent to own lease expires. However, you should remember that you will be paying more to rent – it may make better sense to rent an apartment (we’ve written an article discussing how to get an apartment with no credit history to help you).
You can lock in the purchase price
Locking in the home price gives you peace of mind. You know that the home price won’t continually move further from your ability to buy. With a lease option agreement, you can back out of the deal if the home’s value falls below the agreed purchase price, should you wish to.
You get to try before you buy
A rent to own home agreement lets you learn about the property and the area before you fully commit to buying it. You’ll known whether there are transport issues, bad neighbors, or problems with the property itself before you make a purchase that might otherwise be a mistake.
You create equity in the rent to own home
The rental payments you make help you build equity in the home, which is used toward your eventual purchase price. Over a few years, this equity can be substantial.
Live in the home immediately and not move so often
You could live in an area that you desire, in a home you’d like to buy, without the threat of needing to move at the end of a year-long lease. We all know how much moving costs – money that you could save to building an even bigger down payment (especially if you combine with strategies to drastically cut your expenses).
There are no refunds
The extra rent you pay, and any upfront fees, will be forfeited if you pull out of the purchase. You should negotiate an option payment as small as possible to reduce the potential financial loss.
You are gambling on the final purchase price
The property’s purchase price will usually be higher than the current price – by how much is open to negotiation. You should be sure that the purchase price is acceptable to you before signing the agreement.
You have less control over the rent to own home
The property’s owner (your landlord) is still in control of the property. They are paying the existing mortgage and are usually responsible for making major repairs. Your agreement should consider what happens if the landlord stops making mortgage payments, and should clearly stipulate the landlord’s responsibilities and how they must discharge them.
Potential financial loss if home prices fall
There is no guarantee that the purchase price will be at or below the market price when the lease agreement expires. You may need to decide whether to forfeit the money you have paid to date toward the purchase of your home or purchase at a high price that could take years to recoup.
Most lenders won’t lend more than the market value on a home, so if home values have fallen you may need to find other ways to raise the extra cash to buy the rent to own home.
If you make a late rent payment, you could lose the option to buy
It is likely that your rent to own home agreement includes the obligation to keep up to date with your rent payments and other obligations in your lease agreement. If you don’t, you could lose the option to buy. Making a budget and sticking to it is an essential money management skill to ensure you don’t miss any critical payment dates. Automating rental payments is a good tactic to use, but you must ensure that there is enough money in your bank account to cover the payment.
There may be hidden problems with the property
There is the potential that there are problems with the property that you cannot initially see. You have a title search done before agreeing to a rent to own home contract. A survey should also ensure that you don’t have any unsuspected maintenance and repair issues to tackle.
How to Find a Rent to Own Home
Finding an owner who is willing to enter a rent to own agreement can be difficult. Often, rent to own home contracts are offered by sellers who are finding it hard to sell. Willingness to enter into a rent to own home agreement widens the net of potential buyers. Potential sellers also earn an income (rent) from the lease, which they can use to fund existing mortgage payments.
A good place to start looking for possible rent to own homes is online sites such as Zumper. This is a property rental site that allows you to search in your desired area for rental properties. This will give you a good idea as to the homes available and their rental prices. You may also contact landlords and enquire if they would consider rent to own tenants.
However, for the best deals and the best prices, foreclosure.com has some of the best listings available. They are the nation’s expert in the foreclosure market, where some of the best home prices are to be found. All their rent to own listings are valid. Their team will walk you through the process, and ensure that the home is a valid rent to own property
Is a Rent to Own Home the Best Choice for You?
Before entering a rent to own home agreement, you must make sure it is right for you. Consider questions like:
- Will you qualify for a mortgage at the end of the lease? You should have a plan to improve your credit rating and pay off existing debt during the term of the lease.
- Will the home be right for you at the end of the lease? It may be the perfect home today, but how might your circumstances change in the next few years? If there’s a likelihood you’ll need to relocate for work, or if you plan to have children, will it still be the right home for you?
- Can you afford a higher rent? The rental payments will be higher. This helps to reduce the cost of purchase (acting as a down payment), but if you miss a rent payment, your rent to own home contract could be ripped up – and you’ll lose all the money you have paid to date.
A rent to own home can give you the time to build your finances and credit, and lock in a price on a home that you love. However, you must have the right approach and remain disciplined with your money management if you plan to rent to own. You will then be able to benefit from the many advantages of rent to own, and reduce the risks posed by the disadvantages.
If you are considering rent to own, start by searching the rent to own homes listed on Foreclosure – set up alerts on the system to keep you informed as soon as new rent to own home listings become available in your desired location.