Pros and Cons of Rent to Own

May 13, 2016 by Marty Orefice | Checklists, Real Estate, Rent to Own

Though renting is becoming more popular than homeownership, there are still huge benefits to owning a home.
On the surface, rent to own might seem like the perfect plan. You simply pay monthly rent to a landlord, in the same style that you would with ordinary rent conditions. All you need to do is pay a bit more per month, accumulating rent credit which you can use towards the final purchase of the home. However, it is important to note that there are many disadvantages with rent to own homes, in which things don’t always go to plan. Here, we’ll discuss the pros and cons of rent to own that you may want to consider during your housing search.

Weighing the Pros and Cons of Rent to Own

Pros Cons
Flexibility Losing money
Save money Home depreciation
Improve credit Easy to mess up

Pros of Rent to Own

For those who are struggling to rebuild their credit, increase their income, or become more financially reliable, rent to own sounds like a good option. The end goal of renting to own, for most renters, is to be able to attain a mortgage loan in order to purchase the property. However, you can either win or lose in this type of agreement, especially if you don’t weigh your pros and cons carefully.

Rent to own has several benefits over typical leasing or home buying. One of these benefits is flexibility. If you end up not liking the home very much after renting it, you are not obligated to buy it. Another benefit of renting to own is being able to save money for the long term. If you cannot afford a home right now, rent to own might be a good option for you to get your finances together. Lastly, those who rent to own can improve their credit to qualify for a mortgage. The lease term typically serves as the time period during which tenants can take steps to repair their credit.

However, the risky part about partaking in a rent to own agreement is that there is no guarantee of home-ownership after the deal is over. Renters should be extremely cognizant and make sure to read all the contract terms carefully. You may want to use the Tenant Checklist to ensure you are paying attention to even the smallest details. In most contracts, if renters cannot attain a mortgage, the seller gets to retain all of the tenant’s rent credit that they have earned. This characteristic of rent to own, as well as many others, may be some disadvantages to take into consideration.

Cons of Rent to Own

Several things can go wrong with renting to own since there is a lot of uncertainty that comes with this type of leasing. For the majority of rent to own tenants, they end up not owning the home at the end of the lease period because of something that went wrong during the lease term. We’ll discuss these cons and let you decide if these risks are worth taking in order to eventually own a home.

The chance of losing a large sum of money.

If you cannot afford to purchase the home or are not able to qualify for a mortgage, you do not get to keep the rent credit you have invested in the home. In retrospect, a tenant who rents to own a home but doesn’t end up buying it could have instead rented a smaller home and actually saved more money for the future.

The possibility of the home losing value over the rental period.

Since the purchase price is determined at the contract signing, you have to pay that exact price no matter what happens in the housing market in the future. For example, if you agreed to pay $150,000 at contract signing, you will still be obligated to pay that same amount even if the home value has fallen to $130,000. On the other hand, this can also be a benefit if the home value rises during the rental period.

Not being able to manage punctuality and scrupulousness.

In many rent to own contracts, if a tenant makes a single late payment or does not make necessary home repairs, the seller has the power to evict the tenant and void the contract. This is a loss for the renter since they would not get any of their rent to own money back. Essentially, you would be back where you started, or even worse than you were when you decided to rent to own.

Real Estate Property by Erika Wittlieb is licensed under CC0.

Marty Orefice

About The Author

Marty Orefice

Martin Orefice is a real estate investor who has been in the industry for over a decade. He has experience with rent to own deals from all sides—as a buyer, seller and investor. He created to provide the #1 resource where people can find information about all things rent to own.

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