Is A Rent-To-Own Deal Right For You?

Rent-to-own homes seem almost perfect for those who are struggling financially and want to own their own homes. Unfortunately, this type of real estate transaction is not as tightly regulated as traditional purchases so the buyer needs to beware. To get a better idea of what to expect, read on.

How the Rent-to-own Deal Works

If you are not already a homeowner, you probably rent and you may have come across rent-to-own advertisements when looking for a new place. Even people that are not ready to buy may consider taking advantage of a rent-to-own deal, after all, you have to rent a home so it might as well be one that you can eventually own. Unfortunately, the rent is often far higher for rent-to-own homes than other rentals in the same market, so renting can mean a far larger outlay of money each month for living expenses. These deals usually contain an agreement where you rent the home for several years, say three years, and then complete the purchase at the end of that stated period of time. Usually, a certain percentage of the rent is placed into an escrow account and that money then goes toward your down payment.

What to Watch Out For with Rent-to-own Deals

1. High Rental Rates – As mentioned above, you can expect rent-to-own rental properties to cost more to rent each month. A portion of the rent is used for the down payment, so a portion of your rent is similar to a forced savings plan. Pay close attention to the percentage of your monthly rent going toward the down payment and how the funds will be held for you. This will help you to determine whether or not you are coming out ahead by paying the extra rent. This method of saving up for a down payment can be useful for those who struggle with saving, but you might not have enough to pay the down payment at the end of the rental period if you are not careful.

2. Lending Issues – Some people confuse rent-to-own with for-sale-by-owner deals. In most cases, the seller is not part of the lending deal. You must be prepared to apply and be approved for lending at the end of the rental period. On the plus side, if you have credit issues you should have time to address them while you build up your down payment.

3. Reneging on the Rent-to-own Deal – As you might imagine, there are a lot of things that could happen during the rental period and you need to understand the consequences if you don't want to complete the deal or if you simply cannot complete the deal. You should find out upfront what happens to all that money you've been paying and about any penalties or fees when you fail to follow through.

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