Saving up for a down payment while paying rent on your current home can be a difficult problem for aspiring first-time homebuyers to solve. One solution is finding a rent-to-own home, where some of the rent you pay goes toward the cost of buying the home at a later date.
Rent-to-own deals can be difficult to find, but not impossible. Read on to learn more about how rent-to-own homes work, and where you might find one.
- In a rent-to-own agreement, a portion of the rent payments made over the course of the lease go toward the down payment on the home.
- A rent-to-own home is one where the renter has the option or obligation to buy at the end of the lease.
- Rent-to-own homes tend to be far less common than typical real estate transactions.
What Is a Rent-to-Own Home?
A rent-to-own home is an arrangement where the renter has the option to buy the property after a specific period of time. Renters usually pay a higher-than-normal rent, and sometimes an extra upfront payment. If they decide to buy the home, a portion of what they’ve paid in rent — as well as any upfront payment — is credited toward the down payment.
How rent-to-own works
A rent-to-own agreement usually specifies how much of the monthly rent is to be credited toward a down payment. It also typically specifies the rental term and whether the tenant is obligated to buy the home, and may specify the price of the home. There may be an option fee, which is a percentage of the home price that you pay upfront and also is credited toward buying the home.
For example, imagine you find a home that would typically rent for $1,000 a month and costs $400,000 to buy. A three-year rent-to-own agreement with a 2% option fee means you’d pay $8,000 upfront. If the rent is $1,200 with $200 going toward the down payment, you would collect $7,200 over the rental term. Add that to the option fee, and you’d have $15,200 to use as a down payment.
There are two types of rent-to-own agreements:
- Lease-option agreement. Under this agreement, you have the option to buy the home when the lease ends. If you decide not to buy the home, you would forfeit the extra rent you paid and can’t apply it to a down payment on a different home. The price of the home is often determined at the end of the lease, but may be decided upfront.
- Lease-purchase agreement. Under this agreement, you’re obligated to buy the home when the lease ends. Typically, the price is agreed upon when you sign the lease. If you refuse or are unable to buy the home, the seller may be able to sue you for breach of contract.
Pros and cons of rent-to-own homes
Rent-to-own homes have some distinct advantages over a typical rental or home purchase, but you need to think about the drawbacks before signing an agreement.
Advantages of rent-to-own homes
- Lets you save for a down payment over time. Rent-to-own lets you naturally save for a down payment through your rental payments. You also get more time to save outside of your monthly rent payment.
- Flexibility. Lease-option agreements give you the choice to buy or move at the end of the lease term.
- Allows you to build credit. You can make progress toward buying the home while building your credit score. “Rent-to-own allows buyers with poor credit or no down payment to become homeowners without years of credit repair,” says Tomas Satas, a Chicago-based real estate investor.
Disadvantages of rent-to-own homes
- Cost. Rent-to-own homes usually are more expensive. You likely will pay more in rent or a higher purchase price. You also may have to pay an option fee when you sign, which is an additional cost.
- You lose money if you don’t buy. You lose out if you choose not to buy the home at the end of the lease. “The biggest danger for rent-to-own is if a catastrophe strikes the renter,” Satas says. “They are unable to pay, they breach the contract, and lose the home as well as the principal paid.”
Where To Find Rent-to-Own Homes
One of the hardest parts of buying a rent-to-own home is finding one. These deals are relatively unusual compared to standard rentals or home sales.
Here are some of the best places to look.
1. Real estate agents
Real estate agents are professionals who know their local area and are aware of what’s on the market. Check with local agents to see if they have any leads on how to find legitimate rent-to-own homes. Look in particular for an agent who specializes in rent-to-own properties, says Mike Qiu, owner of Good As Sold Home Buyers in Kirkland, Washington.
2. Local brokerage programs
A brokerage or property manager might be able to match buyers and sellers interested in rent-to-own agreements, or have a listing of rent-to-own opportunities. Look for brokerages in your area to see if they have these programs available.
“The best way to find rent-to-own opportunities is to contact a real estate agent or property management company that specializes in these types of arrangements,” says Alex Capozzolo, co-founder of the San Diego-based SD House Guys, a real estate investment company.
3. Investment firms
Some investment companies buy homes to rent out. If you know of local real estate investment firms — especially those looking to offload inventory — you can reach out to see if they’ll offer a rent-to-own agreement, says Jon Sanborn, co-founder of Philadelphia-based Brotherly Love Properties. Many may be interested, thanks to the potential of higher returns on the property.
When a mortgage lender forecloses on a home, one of its primary goals is to recoup its losses by selling the property for at least the outstanding balance of the loan.
That makes finding foreclosed homes an ideal way to locate rent-to-own opportunities, Sanborn says. If you contact the lender that foreclosed on a home and offer a rent-to-own deal, it may agree. This type of agreement provides the lender with a stream of income like the mortgage payment it was previously receiving, and gives it the chance to sell the home down the road.
Alternatively, if you contact the owner just before foreclosure, they may be willing to give you a good deal to help avoid foreclosure.
5. Specialty portals
There are websites for everything these days, including how to find a rent-to-own home.
“To find rent-to-own home opportunities, buyers can search for properties that are listed as rent-to-own on real estate websites,” Qiu says.
6. Friends and family
Rent-to-own homes are relatively unusual and can require a higher level of trust between the two parties than a typical rental or real estate transaction. If you know someone or have a family member who wants to sell their home, talk with them about the possibility of a rent-to-own agreement. Having a personal connection with a baseline of trust can help make the deal beneficial for both parties.
7. Unsold home listings
If your local market is slow, and listings go unsold for a long time, that can be a good time to try to buy a home through rent-to-own.
“Look for homes that have been on the market for an extended period, as the seller may be more willing to consider a rent-to-own agreement in those cases,” says Ryan Zomorodi, chief operating officer and co-founder of the San Diego-based RealEstateSkills.com, a real estate investment education platform.
8. Unsuccessful sellers
One of the most demoralizing things for someone trying to sell their home is to accept a bid on their property only for the buyer to back out. If you see a home sell and then come back on the market, reach out to the seller to propose a rent-to-own deal.
Keep in mind that there may have been good reasons why the buyer decided to back out, such as major problems with the home.
9. Reluctant landlords
Finding a reluctant landlord is one of the best ways to locate rent-to-own homes, Satas says. Some landlords may enjoy the income but not the effort and liability required of the job. Rent-to-own could appeal to them because it would provide a few more years of rental income from the property, as well as a buyer ready to take it off their hands.
Here are answers to some frequently asked questions about how rent-to-own homes work, and how you find rent-to-own homes.
Yes. In exchange, they offer a chance to buy for people who may not be able to afford a home otherwise.
“Renters should be aware that rent-to-own agreements can be very expensive in the long run since landlords usually charge higher rents than regular rental properties and tenants have to pay an upfront fee as well,” Capozzolo says.
Missing a payment on a rent-to-own home is like missing any rent payment. The landlord can impose penalties and could move to evict you. Depending on when you miss the payment and the terms of your agreement, it could affect your ability to buy the home at the end of the lease.
Though rent-to-own real estate is not common, it is legal. Laws may vary from state to state, so consult a local real estate attorney if you have legal questions.
The Bottom Line on How To Find Rent-to-Own Homes
Finding rent-to-own homes can be difficult given their relative rarity compared to other real estate sales. However, if you look in the right places, you may find deals that will benefit both you and the home seller.
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