Back HomeHow to Find (or Create) a Rent-to-Own Home
How to Find (or Create) a Rent-to-Own Home
Do you feel emotionally ready to buy a home, but your lack of capital or credit history has resigned you to renting? There is a middle ground: a rent-to-own home. This arrangement is a godsend to renters who want to build equity in a home without surmounting the hurdles that come with buying a home outright. So how do you find such a dreamy scenario? Read on for the steps to take and pitfalls to avoid.
Pick a place that’s ripe for a rent-to-own arrangement
Finding a property owner agreeable to a rent-to-own scenario might not be easy.
“Probably about 5% of the market is transactions such as this,” says real estate agent RJ Avery, of Richardson, TX. And they tend to be in smaller cities or towns—transitional areas, where the real estate market isn’t very desirable or competitive.
In short: You might have to search in areas that might not have everything you’d like, such as a good school district or great restaurants down the block. In those areas, a property owner might be eager to just go ahead and lock in a decent purchase price.
Locate a reluctant landlord
Your best bet are property owners who reluctantly backed into becoming landlords—in other words, they tried to sell the home, were unsuccessful, then began renting it out instead.
Unlike landlords who own many properties and are committed to raking in rent dollars, these landlords by default often own just one single property, and might be gung-ho to get the property off their hands.
Additionally, typical rent-to-own agreements specify that repairs and upgrades be made by the tenant (like most terms, of course, this is negotiable), an item that could also sway wavering sellers looking to minimize their obligations as landlords.
Know your options
There are numerous elements and potential details in a rent-to-own arrangement, but most of these agreements follow the same basic principles—the potential buyers and sellers agree on the following:
- A time frame to transition from rent to own (anywhere from a few months up to five years)
- The home’s purchase price (either locked in or to be determined by the end of the lease)
- An option fee—a nonrefundable deposit, but typically credited upon sale—to secure the right to purchase the property (typically anywhere from 2.5% to 7% of the home’s price)
- The home’s rent, which will typically be set slightly above market (That way, a portion of it will include equity in the purchase property, typically between 25% to 50% of the total rent.)
Assess the risks
There are actually two types of contracts: a lease-purchase and a lease-option. With a lease-purchase contract, you’re locked into buying the home by the conclusion of the contract. If you don’t, you will forfeit all the money you’ve supplied to the seller over those years and could also face legal action. If you choose this route, you should be absolutely clear on your long-term plans and financial outlook. Plenty can happen to your life and livelihood that could affect whether you can (and want to) own this house.
A lease-option contract is less rigid. In this arrangement, you can choose whether or not to purchase the home by the contract’s end, and the landlord must honor it. This agreement gives you a choice to opt out of the purchase within the agreed-upon time frame, offering a bit more wiggle room if you’re uncertain you want to own the place. But even in this case, you might forfeit your deposit and equity, so it’s important to be sure that rent-to-own is the direction you really want to take.
Is rent-to-own right for you? Only you and your potential seller can determine that for sure. If you are renting a property you love, need the time to build up credit and/or down payment, and have an amenable landlord, it might be the right choice.
Still, in most typical cases, “it’s usually better to buy outright—but it is case by case,” says Avery. “Whatever you decide, it’s always best to consult an attorney or licensed real estate broker to be sure you have all the facts.”
