With rent-to-own homes, you have the opportunity to lease a home and buy it before your lease ends. This gives you time to build up your credit and qualify for a mortgage loan so you can buy your dream home.
There are many rent-to-own programs to choose from. In this guide, we’re covering the best ones, as well as how to avoid the most common scams.
Rent-To-Own is more of a concept than a program. Most people were introduced to the concept of rent to own home programs through appliance stores, where you can rent a stereo and apply your monthly rental payment to the purchase price of the equipment. But it doesn’t really work that way in real estate. The good news is that if you have the desire to own a home, and aren’t sure if you can qualify, we’ve got options to help you reach your dream.
In this guide, we’ll dispel the myths about Rent-to-Own and learn about all of the creative options that are available to help you begin building wealth through the ownership of your very own home.
Table of Contents
- What is a Rent to Own Agreement
- How the Rent to Own Process Works
- Why Rent-to-Own?
- Rent to Own Misconceptions
- Understanding How Rent-to-Own Programs Work
- Best Rent-to-Own Programs
- Work with a Licensed Agent to Find the Right Rent-to-Own Program
Home> Rent to Own Process: How does Rent-to-Own Homes Work?> Legitimate Rent to Own Programs: Best Options for Prospective Buyers
Table of Contents
- What is a Rent to Own Agreement
- How the Rent to Own Process Works
- Why Rent-to-Own?
- Rent to Own Misconceptions
- Understanding How Rent-to-Own Programs Work
- Best Rent-to-Own Programs
- Work with a Licensed Agent to Find the Right Rent-to-Own Program
What is a Rent to Own Agreement?
A Rent-to-Own Agreement (also known as a lease purchase, right to purchase, or seller carry) is a type of transaction by which a buyer enters a rent to own contract where they agree to pay a monthly fee, in exchange for the right to live in and purchase a property at an agreed-upon date in the future. They move in now, but pay for it later.
The exact exchange and terms are dependent on the type of arrangements that the parties agree to. We’ll explore examples of those agreements later in the guide.
Rent-to-own differs from a traditional leasing arrangement in that the tenant may have the right to purchase the property at any time during the agreement, or may in some cases also terminate the agreement by returning the property to the original owner (though they may have a limited time frame in which to do so, and the penalties can sometimes be high).
Getting into a rent-to-own home agreement may be a smart choice when a prospective buyer doesn’t have the credit or funds to buy a home outright, but is in a market where prices are rising quickly and they need to get in now before they are priced out forever.
What is a Rent to Own Agreement?
While most homebuyers need a mortgage in order to finance the purchase of a home, rent-to-own homes provide an alternative route to help you eventually purchase the home. With rent-to-own, you don’t have to sweat the credit score requirements for acquiring a mortgage, or save up a huge down payment, in order to buy. Instead, you can rent a home for a certain amount of time with the option to buy the home before the lease ends.
Rent-to-own is more complicated than renting, so you’ll want to do thorough research to determine whether this is the right route for you. Also, you’ll need to take certain precautions in order to protect your own interests. Consulting with a licensed Realtor with special training in these types of transactions is the best place to start.
Why Rent-to-Own?
Rent-to-own agreements essentially give you the ability to buy a house and pay for it later. For example, through what’s known as a seller carry, you can buy now and pay for it over time. In this case the seller acts as a bank, so your loan payment goes directly to him. This can be a smart option if your current financial situation prevents you from securing traditional financing.
With rent-to-own, you will negotiate the terms with the property owner to determine the length of your lease, the purchase price of the home, your rent payment, and the conditions of your agreement. When or before your lease ends, you can buy the home outright, assuming you are able to secure a mortgage loan before then.
THE TENANT / BUYER PERSPECTIVE
If you are a prospective home buyer, then the rent-to-own option gives you time to earn money for the down payment if you want to buy the property in the future. This timeframe is typically 1 to 3 years, depending on your negotiations with the seller.
As a tenant, opting for a rent-to-home may be a good option if:
- You have bad credit and don’t qualify for an affordable mortgage
- You can’t currently afford to make the down payment on the home
- You’d like the opportunity to test the property before you buy it
- You want the added security of the purchase price of the home remaining the same throughout the contract, despite market fluctuations
Read: Keys to Rent-to-Own Success
THE LANDLORD / SELLER PERSPECTIVE
As a seller, the rent-to-own model can be a good option if your house has been on the market for a while and you haven’t been able to find a buyer. Or, perhaps you have had interested buyers but they haven’t qualified due to their poor credit or lack of a down payment.
Going the rent-to-own route may attract potential buyers with the appeal of them being able to build up their credit and/or save money until they are ready to buy.
Some benefits of the rent-to-own model for landlords include:
- You can lock in the future sale price of your home now, regardless of market fluctuations
- You can essentially “pre-qualify” the tenant as being a good fit since you have already
- interacted with them while they rented the home, and they will probably treat the home with more respect
- You will get a higher return on your investment since the tenant will be responsible for repairs
If the tenant fails to close the transaction, they forfeit their down payments and all monthly payments.
Rent to Own Misconceptions
Before you jump on rent-to-own, it’s worth uncovering the most common misconceptions about this option. This will help you avoid getting taken advantage of, or otherwise not being able to buy the home at the end of the lease.
Are rent to own programs legitimate or worthwhile? That depends. It all comes down to you finding the right program and settling on a rent to own contract that serves your best interests.
Here are the most common misconceptions about rent-to-own home buying:
- Rent-to-own is the best way for buyers with bad credit to buy a home.
- Rent-to-own involves seller financing.
- Rental payments are applied to the down payment on the home.
- If the tenant doesn’t buy, they get a portion of their money back.
- Buyers earn equity during the leasing period.
While there can be some truth to all six points above, it varies by option and contract. To avoid scams, be sure to understand the opportunity and associated documents before proceeding with any type of offering.
Avoiding Scams
Many prospective home buyers ask, “Are there any legitimate rent to own home programs to buy a house?” Ultimately, the answer is Yes, though not all programs are created equal. There are some rent-to-own scams to look out for.
RENT-TO-OWN SCAMS WARNING SIGNS:
- Your Agreement Sounds Too Good to be True. Scam artists prey on idealistic home buyers that are looking for the perfect deal. If your agreement sounds too good to be true, it probably is.
- You Have a Bad Feeling About the Seller. Trust your instincts. If a seller gives you a suspicious first impression, or tries to manipulate you into settling on shady lease terms or signing the lease before you are ready, then this could be a sign they are trying to pull one over on you.
- The Home is Unreasonably Overpriced. With some research, you can determine the true cost of the home based on current market prices. Your real estate agent can assist you in establishing the real purchase price. If a buyer overvalues their home, this may not be a good option for you.
- The Lease Contract is Ambiguous. Don’t sign anything you don’t understand. Some scammers use “legalese” to trick you into agreeing to terms that aren’t in your best interests. Make sure you have the assistance of a qualified professional like a Century 21 Northwest real estate agent to review the contract with you!
- The Seller Includes Additional Fees. Examine your lease agreement to see if the seller has included any hidden fees. These can add up, resulting in you paying more than the home is worth.
- One-sided Agreements. The seller can get out of the agreement but you can’t.
To be sure you are protected, we highly recommend having a licensed Realtor review any real estate documents before you sign.
Understanding How Rent-to-Own Programs Work
The rent-to-own process starts with you finding the right rent-to-own program to suit your needs. With the help of a licensed agent, you can find the perfect home and negotiate the terms of your agreement so you can buy the house when you are ready.
Rent-to-own programs are helpful to anyone who is going through financial hardship and can’t qualify for traditional lending, but who has taken steps to recover their credit and save up for their down payment.
All rent-to-own programs include their own terms, so be sure to do your research and discuss your options with a trusted Realtor. For example, some programs require that you have not had any late rent payments in the last six months, and that you have saved 5 percent of the purchase price towards your down payment.
Best Rent-to-Own Programs
In choosing the best rent-to-own program, you will want to consider your credit situation, your ability to save for the down payment of the home, your ability to make regular rent payments, and your goals for homeownership. The reality is that you can buy a home with poor credit, but it takes finding a legitimate program, and having a short, midterm, and long term strategy to make sure you are protected.
Here are the top rent-to-own options for you to consider:
Right To Purchase Program
One program is the Right to Purchase program offered by Home Partners of America. With this option, you are offered “three to five years* of rent certainty with an initial financial commitment of just one year.” Here’s how it works:
- Apply: Prospective tenants fill out a Pre-Qualification Application, along with a full credit and background check.
- Find a Qualified Home. You will then work with a realtor to find an approved property. Then, Home Partners will attempt to purchase the home. Click here for their Comprehensive Property Guide.
- Home Partners Buys the Home and You Lease the Home. You will be required to sign a one-year lease term agreement, as well as the Right to Purchase Agreement.
- You Buy the House. You lease the home and have the right to buy it before the lease ends.
Option To Purchase Program
An Option to Purchase program is a contract that allows you, the buyer, the exclusive right to purchase the property. Typically the tenant will sign both a customary rental lease agreement and an agreement that provides him/her the first right of refusal should a seller decide to sell. It might also have language that discusses how the purchase price will be determined should the sale occur. The main protection provided for the tenant is that once the terms are agreed to, the seller cannot sell the property out from under him/her without him first having that “Option” to buy the house.
Seller Carry Program
A Seller Carry (or seller carry back) Program is an owner-provided financing option. This option – “carrying back a note” – can be beneficial to both the buyer and seller.
Sellers tend to take this route when they have trouble finding qualified buyers. In the case of restricted lending options, the seller can “carry back” the note on their own house. Here’s how this works:
- The buyer and seller sign a promissory note saying that the buyer promises to pay a certain amount, at a certain interest rate, for a specific amount of time – only instead of paying to a bank, the buyer makes payments to the seller. The seller in this case is acting as the bank.
- The seller transfers the title to the buyer and collects monthly rent payments. If the tenant stops making payments, then the seller can take the property back and try to sell the property again.
Lease-Purchase Agreement
A Lease-Purchase Agreement is the most popular rent-to-own program option. It combines the main components of a traditional purchase contract with a lease purchase agreement. The contract covers the purchase price of the home, the length of the agreement and gives the buyer and seller all of the typical protections afforded in the standard purchase contract.
The contract will also refer to a pre-possession agreement which is usually handled as an addendum to the contract. It will cover how the buyer and seller will act prior to the actual sale. It will typically include a prepossession monthly fee (rent), and who is responsible for maintenance, insurance, and any other expenses.
Simply put, a lease-purchase purchase agreement is a regular purchase contract that includes an agreement for a tenant to move in, make improvements, and build equity on a home, before it is actually purchased.
Work with a Licensed Agent to Find the Right Rent-to-Own Program
Taking the lease-to-own route is a serious decision that requires proper research and preparation. To avoid being taken advantage of, it’s best to work with a licensed agent to find a legitimate rent-to-own program.
At Century 21 Northwest Realty, we assist prospective homeowners in navigating the rent-to-own process, negotiating the terms of their agreement, and closing on the home of their dreams. If you need help finding the best program for you, partner with a trusted rent to own agency.