Rent to Own vs Buying

March 10, 2017 by Marty Orefice | Real Estate, Rent to Own

Rent to own homes may become popular again.
Owning a home is the American Dream. Buying a home and renting to own both lead you toward the American Dream, partially, because buying a home is the destination of a rent to own journey. However, rent to own and buying a home don’t always overlap. Many people who rent to own eventually do not purchase a home and you can buy a home without renting to own.

What is rent to own?

Rent to own is when you rent a property for a few years with the intention of purchasing it at the end of the lease. You pay an option fee at the beginning of the lease so that you are given the first option to buy the home at the end of the lease. You pay rent each month like you would in any other rental scenario. Additionally, you pay a premium on your rent each month. That premium is deposited into an escrow account and, at the end of your lease, will be credited toward your down payment on the property.

Why Would I rent to own instead of buying a property?

Rent to own is a good option for those who want to purchase a property, but:

Don’t qualify for a mortgage

Getting a mortgage isn’t as easy as it once was. It’s helpful to have some time to improve your credit score. At the same time, paying rent with no end payoff may feel like you’re throwing away money. Contributing towards your down payment while living in the property you want to buy.

Need to save up money

Saving up money takes a long time, especially when life gets in the way and you go months without saving. Rent to own has saving up money built into the concept. Sometimes, it’s easier to save up money when you contractually need to.

Aren’t sure they want to live in the area yet

You may not be sure you want to stay in the city or town you’re in, but you need a place to live for the time being. You don’t want to waste your time renting, but you don’t want to make a large commitment to owning in the area for a long period.

If you’re a member of the military, and you’re in a position where you might be transferred, investing in a home doesn’t make too much sense. However, if you rent to own a home, you have the option to back out at any point during the lease without having made the large financial investment of purchasing a home.

Want to see what the house is like before moving in

You may have found a beautiful home, but you don’t know too much about the neighborhood. What are the neighbors like when there isn’t a realtor around? Do the floorboards creek at night? Surprises seem to come out of the woodwork when you purchase a home, but if you live there for a short time before moving in, you’ve eliminated the surprises. You know what you’re getting into before you make a large investment.

Why Would Someone Who Rented to Own Not Purchase the Home?

Many of the reasons why you would choose to rent to own are the reasons why you eventually don’t buy. You may have decided that you didn’t like the neighborhood, the city or the home itself. You may not be financially able to purchase the home, because you didn’t qualify for a mortgage or because your financial circumstance has changed.

Purchasing the home outright does not protect you from any of the reasons below.

You didn’t like the neighborhood, the city or the home. You would be stuck with a property you don’t want. Even worse, you would have purchased it. Therefore, you would have to go through the trouble of selling it instead of just walking away with some money lost.

You don’t qualify for a mortgage at the end of the lease. You probably would not have qualified at the beginning either. Yes, you lost a little extra rent money, but you took a chance to own a home. That's brave. Hopefully, you will be able to qualify for a mortgage soon.

You could no longer afford to make the monthly payment. If your financial circumstance changed while you were paying off the mortgage, it might have been difficult for you to continue paying mortgage payments. Your home may have ended up foreclosed, and your credit ruined.

There are risks to rent to own; however, there are also risks to purchasing the home. If the reasons above don’t apply to you, buying a home might be the best option for you.

What’s the benefit of purchasing the home directly?

A home is a great investment. The money that you would normally pay towards rent can instead go towards paying down your mortgage and being closer to debt-free. When you no longer want to live in the home you can sell it and regain most of, if not more than, what you paid for it. Buying the house directly does save you money, and you will pay off the mortgage a few years sooner.

While there are great reasons to rent to own, there are a lot of situations where you should probably purchase the home directly, like:

  • You know the neighborhood
  • You’re planning on settling down in the area
  • You have the money for a down payment
  • You have a good credit score and can qualify for a mortgage

If you can’t check off every statement above, rent to own is a good idea for you. Rent to own gives you time to check off those boxes so that you can be ready to confidently own your own home.

New Home Construction by Paulbr75 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 RentToOwnLabs.com to provide the #1 resource where people can find information about all things rent to own.

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