1. A rent-to-own home is a home that you start out renting and then have the option to purchase at the end of the rental term, which usually lasts from two to five years.
2. A portion of the rent you’re paying while still in the agreement period is income for the landlord/seller, and a portion is going toward the future purchase of the home as a rent credit.
3. Because of rent credit payments, your total rent may be pushed above market rate—but it helps you in the long-run if you intend to purchase (because the rent credits will be saved up for the future down payment or closing costs).
4. The seller decides the sale price and rent they’ll charge you for the house, although both are negotiable.
5. Once the contract is signed, the seller must sell you the home for the price that was agreed upon when the contract began, even if housing prices around the home rise or fall.
6. Rent-to-own homes are attractive to people who may need time to increase their income or savings before buying a home, or for people who have bad credit—you can live there and rent while you repair your credit in time to potentially buy the home at the end of the contract.
7. You’ll have to pay a nonrefundable deposit called an “option fee,” which is typically one to five percent of the purchase price.
8. The deposit is added to the rent credits you build up over the course of the contract to go towards the down payment or closing costs if you decide to buy. If you don’t decide to buy, they typically become income for the seller.
9. At the end of the lease term you have the right to buy the home at the agreed upon price or walk away (forfeiting the deposit and rent credits). Maybe you aren’t able to come up with the necessary savings to purchase the home, or maybe after “trying out” the neighborhood you don’t end up liking it.
10. If you decide you want to buy the home, you must be able to get a loan in time to purchase the property—which includes saving for the remainder of the down payment, closing costs, and other fees.
If the end of the agreement comes and you still don’t have your finances in check, you may not be able to go through with the purchase.
Pro Tip: Since every state has it’s own regulations when it comes to rent-to-own contracts, you should consult a realtor and a real estate lawyer to have the financial implications laid out for you and to avoid scams.
