If you’ve heard of rent-to-own homes but haven’t given them much thought, you’d be forgiven for assuming that there must be a huge catch to make the whole thing work.
Or, maybe the idea sounds so far-fetched you wonder if rent-to-own homes are even real in the first place — totally fair!
But renting-to-own is a real and valid path to homeownership, so we talked to five people who’ve done it — either from the buying or selling side — to learn more. This includes perspective from Margaret Labus, a real estate agent in the Lake Geneva, Wisconsin, area, who has 18 years of industry experience.
Before we get into the stories, let’s start with a brief primer on the business of renting-to-own (RTO).
It’s not terribly common to rent-to-own because most of the people who are in the rental situation are those who, for whatever reason, can’t get financing the conventional way through a bank. But, it does open some possibilities with the right seller.
- Margaret Labus
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RTO 101: An introduction to rent-to-own homes
As we’ve already introduced, yes, rent-to-own homes are real. It’s a perfectly legal way to buy or sell a house — and creates a unique scenario that requires extra patience and understanding from both sides.
“It’s not terribly common to rent-to-own because most of the people who are in the rental situation are those who, for whatever reason, can’t get financing the conventional way through a bank,” explains Labus. “But, it does open some possibilities with the right seller.”
These possibilities can be stipulated in the rent-to-own agreement — which is also sometimes referred to as lease-purchase, or a lease-option agreement.
The main difference is that with a lease-option, a tenant has the — you guessed it — option to buy the home at the end of their lease term. With a rent-to-own or a lease-purchase agreement, however, the tenant has already agreed to buy the home after a specified period.
Renting-to-own isn’t for everyone, and it’s definitely not something you should go into without doing your research. But if you’ve found a home you love and you just need a little more time to get your credit in order or save up a down payment, a rent-to-own agreement could be your literal foot in the door.
The only thing is, the seller generally also has to see a benefit in the agreement, otherwise they may as well just sell the home outright — but this isn’t always the case.
1. Renting-to-own as an act of goodwill
“One investor I work with works solely in the rent-to-own arena, because they have it as their mission to supply good and fair housing to people who don’t have the means to purchase right now,” says Labus.
Her investor client believes that everyone deserves to live in a place they can be proud of and be treated with dignity.
“With each house purchased by this investor, there’s an express goal to renovate and build out a home nicely, then turn it around and have it available for a tenant to rent-to-own,” Labus explains.
Labus’ investor client maintains around 50 homes in their area and is happy to accommodate a tenant’s request to move to another part of town — effectively transferring their rent-to-own agreement as needed.
“It’s not every investor who works like this, but this person has deep roots in the area and they’re emotionally committed to the success of our communities.”
2. A lease-purchase on a dream home
Homeowner Jeff Johnson bought his Maryland home through a lease-purchase agreement. The flexibility of this arrangement made possible a purchase he was not yet in a position to otherwise pursue.
“I opted for a lease-purchase agreement because this was my dream home,” says Johnson. “I didn’t have enough finances at the time, and the lease-purchase agreement allowed me to save some money for the down payment.”
Since one caveat of rent-to-own homes is that property values are likely to change during the term of the agreement — which could extend from one to five years — buyer and seller must determine a sales price that feels fair to both parties.
“The price I agreed to was slightly higher than market value at the time of purchase, and that’s because the lease agreement was for three years,” explains Johnson. “The property value would obviously rise during that time, so it seemed like a fair deal to me.”
In Johnson’s case, both parties successfully upheld their ends of the bargain, and he paid the agreed-upon price at the end of his three-year lease term.
“Rent-to-own seemed like a great option to me because I was in a financial rut. This allowed me to save some cash for a down payment, pay all the bills on time, and improve my credit score — all while living in my dream home that I’d eventually get to buy.”
Johnson admits that there was one unexpected challenge with renting to own, and that was property maintenance.
“I had to take care of the repairs on my own,” he says. “This is usually the landlord’s responsibility, so I was a little surprised when I had to pay for all of the maintenance.”
So it’s no surprise that Johnson’s advice to prospective rent-to-own tenants is to ensure that maintenance and repair requirements are clearly outlined in the contract to avoid unpleasant surprises (or potentially biting off more than you can chew).
3. A rent-to-own with an option to buy
Keith Sant bought his home in Columbus, Georgia, following a five-year rental agreement with an option to purchase.
“While signing, the price we agreed upon was $230,500, and 20% of my rent went toward the down payment,” says Sant.
He was grateful for the opportunity to save money and improve his credit score while living in a house he’d already locked in at a fair purchase price. Five years is a long time in the real estate world, and Sant acknowledges that interest rates did fluctuate while he was renting — but those ups and downs didn’t negatively influence his decision to buy.
“Since the purchase price was decided on the agreement while signing, that didn’t change,” he says.
Sant had been searching for a home for eight months before finding the one he ended up renting-to-own. And, knowing he could lose money if he chose not to exercise his purchase option, he didn’t take the decision lightly.
“I weighed the pros and cons of renting-to-own from a buyer’s point of view, and eventually I decided to go with the deal,” Sant explains.
“Rent-to-own can be a good idea for buyers who are unable to qualify for a mortgage — instead of putting up a heavy down payment before moving in, you can build equity in the house over a period of time.”
For anyone considering a rent-to-own home, Sant recommends thoroughly researching the seller.
“Check the credit report of the seller for any red flags. Obtain a title report to see how long the seller has owned the property — the longer they’ve owned the property, the more equity they have.”
Even if you have a few years of renting ahead of you, if you’re potentially going to buy the property, don’t skip your due diligence before signing an agreement. Have a home inspection completed, order a title search, and — we can’t stress this enough — get everything in writing between you and the seller.
4. Rent-to-own for the flexibility
In busy Los Angeles, homeowner Cristina Ortega bought a home through a rent-to-own agreement that offered an option to buy.
Though she knew a portion of her rent was being set aside for a down payment and that she would likely lose those funds if she chose not to buy, Ortega appreciated the flexibility of the rent-to-own arrangement.
“I was able to test out my home and the neighborhood before sinking all of my savings,” she explains.
Ortega further enjoyed the ability to make her home feel like it was really hers — even before her name was on the property record.
“When renting-to-own, you have more flexibility than most tenants. You can renovate, decorate, and maintain your home as you like,” Ortega says. “You also lock in the purchase price in the initial contract, which ensures that you pay the same price even if property values rise in the meantime.”
Of course, rent-to-own agreements vary, so don’t just assume that yours will be a renovation free-for-all. You’ll want to set those parameters with the seller to specify what types of changes are and are not allowed from the very beginning.
Ortega says that her own only qualm with renting-to-own was that the house does remain in the landlord’s name during the rental period — and this can possibly lead to a legal nightmare.
“If the homeowner defaults on their mortgage payments, there’s a chance the house could go into foreclosure.”
Rent-to-own homes are real, but buyers should proceed with caution. It’s worth repeating: Do your due diligence!
5. Renting-to-own from a seller’s perspective
This is where I break the fourth wall, dear reader, and share my own experience as a homeowner who once sold a house in South Carolina using a rent-to-own agreement.
Selling under these conditions was not my first choice, but the home in question was in need of updates and repairs that I simply didn’t have the cash for at the time. I couldn’t afford to bring the house up to desirable market conditions, but with limited equity in the property, I couldn’t sell it at a fixer-upper bargain price, either.
When an interested buyer — who already lived in and loved the neighborhood — called and asked to look at the house and promptly fell in love despite the 1980s builder-grade “charm,” we were both eager to work out a deal.
Her finances were in great shape, but she needed time to build up her credit history before her mortgage lender could approve a loan. And I’d had a FSBO sign in my yard long enough to know that prospective buyers were not lining up at the door.
So, we signed a one-year rent-to-own agreement at a purchase price of $110,000. She paid a $3,000 non-refundable option fee upfront, and rent was $1,000 per month with $200 set aside toward her down payment. (My monthly mortgage payment was $780 — I was not making money on this agreement!)
Importantly for me, we agreed — in writing — that she would purchase the house as-is and be fully responsible for all maintenance and repairs for the duration of the rental period.
In the end, it took a little more than two stressful years before we were able to complete the deal.
Would I navigate a rent-to-own home again? No.
Am I glad the concept exists? Absolutely!
They’re real — but they can be risky
Rent-to-own deals can be a welcome solution for both buyers and sellers — but there are risks on both sides.
As a buyer, you could potentially spend thousands of dollars on maintenance and routine repairs for a home that isn’t actually yours yet. And if your seller defaults on their mortgage even though you’ve been paying rent on time, the home could go into foreclosure without you having any idea it’s happening until there’s a notice taped to your door.
Sellers, meanwhile, assume the risk of late rent payments, limited knowledge as to the condition of the home during the rental period, and the possibility of a buyer needing longer than anticipated before the sale can be completed.
And both sides run the risk of the other party backing out. Financial protection for all parties may be built into the rent-to-own contract, but there’s little to be done about the inconvenience and disappointment resulting from a deal that falls through.
“RTO” may be short for rent-to-own, but it’s also a good reminder of the three things you’ll need for this type of transaction to be successful: Research, Trust, and an Open mind.
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