Published On: January 11th, 2023

Where to Find Rent to Own Homes?

Homeownership is becoming harder for more Americans to achieve. Higher home prices, which has outpaced income growth, and higher interest rates have made it more challenging to start on the path to home ownership, especially for first time home buyers. However, rent to own homes are a potential solution for future homebuyers. Rent to own homes provide benefits of both renting and owning. Future homebuyers can try out a home first, build equity and decide to purchase later.

Where can one find rent to own homes? Unfortunately, the traditional real estate industry does not actively promote rent to own homes as they are not incentivized to. Rent to own homes are out there and some are even found in desirable neighborhoods. Before starting a search for rent to own homes, be sure to understand if a rent to own home is a good fit for your situation.

What Are Rent to Own Homes?

A rent to own home is a rental with an option for the tenant to buy the home from the landlord after a set lease period. Rent to own homes provide a middle ground between renting a place and buying a home. Three common benefits of rent to own homes are: build equity while renting, improve renter’s finances, and try it out before committing to buying it.

Build Equity While Renting
In a typical rental situation, all the renter’s rent goes to the landlord. However, with rent to own homes, the renter can build up equity while renting, because most rent to own agreements for homes stipulate that a portion of the option fee and rent is set aside to purchase the home. Check with the landlord/seller on the details of allocating part of rent to the home’s purchase, which is usually specified in the rent to own home agreement.
Improve Finances
Most rent to own homes are ideal for individuals with either bad credit or those who do not have enough saved for a down payment. Home buyers with poor credit may still qualify for bad credit mortgages, which are much more expensive than conventional mortgages. Renting with the option to buy later provides future home owners with the opportunity to lock in a home and the time to improve their credit score and build up their savings for a down payment. In areas with tight housing supplies or fast appreciating home values, the option to lock in a home is very beneficial, especially if the home buyer needs more time to straighten their finances.
Try It Before Buying It
A rent to own home allows a home buyer to try the home out before committing to buying the home. Most people focus more on the positive scenarios with owning their new home. However, there could be some scenarios that could turn a dream home into a nightmare, such as unfriendly neighbors. Rent to own homes provide the flexibility of knowing the home and neighborhood better before going through with the purchase.

Getting into a rent-to-own agreement does not need to be a leap of faith, read the contract carefully, understand it before signing and only sign if you are comfortable with the terms of the agreement.

Avoid Pitfalls with Rent to Own Homes

While there are numerous benefits with rent to own homes, there are also pitfalls to watch out for. The top three things to consider when evaluating rent to own homes are to avoid lease purchase, understand the rent to own agreement’s term, and treat rent to own similar to buying a home.

Avoid Lease Purchase There are two types of rent to own home agreements, lease option and lease purchase. Lease purchase requires the tenant to purchase the home after the end of the lease. Lease option gives the tenant the option to buy the home or not. It is better to avoid lease purchase as it negates a key benefit of rent to own, which is to try out a home without having to commit to buying it upfront. Make sure that the rent to own agreement is a lease option which provides the flexibility to change one’s mind with buying the home.
Understand What Is In The Agreement Sadly, there are no federal US laws governing rent to own home agreements. However, some states may have regulations covering them. Terms can vary from one landlord or seller to another. It is important to read and understand what is in the agreement. The main areas to focus on are: financials, maintenance, and termination of agreement.
- Financials: A good rent to own agreement will fully disclose the option fee, monthly rent, purchase price of the home, and option credit (what percentage of rent and option fee are counted towards down payment, if any). In addition, understand what happens to the option credit in the event if the tenant decides not to purchase the home or there is early termination. Negotiate with the landlord to specify how much of the option credit is paid out if home is not purchased or due to early termination.
- Maintenance: Who is responsible for what maintenance? It is common in most rent to own home agreements that the tenant is responsible for maintaining the yard, such as mowing the grass, cleaning out gutters, and snow shoveling. Be cautious of agreements in which the tenant is responsible for structural issues, such as leaking roof, busted pipes, malfunctioning hot water tank, broken heating unit, etc. In such scenarios, tenants could potentially be on the hook for expensive repairs.
- Termination of Agreement: Unscrupulous landlords will try to find ways to have the agreement terminated early so they can keep the option fee and any option credit. Understand what conditions can result in early termination of the agreement, such as late rent, failure to maintain the property, due causes for eviction, and if the tenant has the option to exit agreement early. In the event of early termination of agreement, carefully understand what happens to the option credit and option fee.
Treat It Like Buying a Home
Before committing to a rent to own agreement with a longer term lease and higher cost than a normal rental, make sure the purchase price for the home is reasonable, has no hidden issues, and meets your needs.
- Reasonably Priced: A quick way to estimate how much a home is worth is to use Zillow or Redfin to check the estimated price for the home. A more refined method is to look at similar homes recently sold in the area and estimate an average price, such as price per square foot. Is the purchase price for the rent to own home reasonable when compared with the estimated price for the area? Be cautious if the purchase price is significantly above or below comparable homes in the neighborhood as those are usually red flags.
- Hidden Issues: Are there liens on the property, are there structural issues with the home, are there lead paint or asbestos in the house, is the soil contaminated, is the property in foreclosure, does the landlord actually own the property, etc.? When traditionally buying a home, the seller has to provide a disclosure statement that addresses the issues listed above. For rent to own homes, a disclosure statement is not required. Therefore, the onus is on the renter/buyer to make sure the home has no hidden issue. Inspect the property yourself, ask the landlord/seller to provide a disclosure or a signed statement on the home’s condition, or hire professionals to inspect and run a title search.
- Meets Your Needs: Does the home meet your immediate and near future needs? Is your family expected to grow soon? Do you work from home and need space for an office? Do you have any hobby that requires extra space to store equipment or supplies, like sewing or woodworking? List out and rank which criteria are important for your convenience, happiness, and safety. Some compromise may be needed, but focus on whether the home satisfies the majority of the top conditions.