Some will tell you that being a renter is a total waste of money. Every month your hard-earned dollars are sent to your landlord and he or she pays down a mortgage with them. Your landlord builds equity and you get nothing.
The problem is, that for various reasons, you just may not be able to buy a home. Maybe you have a low credit score, a job that doesn’t pay enough, a lot of student loan debt, or you haven’t been able to save money for a down payment. If you are diligent, however, you can find a way to put your rent dollars to work, and that method entails entering into a rent-to-own agreement.
Investopedia defines such a contract this way:
“You rent a home for a certain amount of time with the option to buy it before the lease expires. Rent-to-own agreements consist of two parts: a standard lease agreement and an option to buy.”
Joe finds a home he likes in affordable Athens, Georgia, and the $1,500 per month rent is doable for him. The landlord has mentioned a rent-to-own plan, and it would work like this:
- Joe signs a lease obligating him to pay $1500 per month.
- He also signs an option to buy his home at a pre-set price of $200,000.
- Every month, the landlord agrees to put $500 of Joe’s monthly rent toward a down payment credit.
- At the end of five years, for example, Joe would have a nice $30,000 down payment.
Dangers of Renting to Own
Rent-to-own deals are considered what lawyers call executory contracts. Such an agreement is a contract that is not yet completed. If Joe makes all of his payments on time, then he will have accumulated a down payment, and then he can attempt to get financing for his home.
One problem that has occurred with rent-to-own agreements is that unscrupulous landlords talk tenants into accepting a high monthly payment. In some instances, when the renter inevitably misses or is even a day late on a payment, the landlord has the right to cancel the contract and keep all of the rent money that has been tendered.
If Joe missed his 59th payment, he could forfeit all of the accumulated down payment dollars and, in addition, the landlord could also evict him, and Joe would have lost his place to stay, his opportunity to buy the property, and his accumulated down payment funds. Some states like Texas frown on executory contracts for the reasons just mentioned and have put into place protections for those that rent-to-own like Joe. Other states may not be so forgiving.
If the rent-to-own contract puts the burden of getting a loan after a specific time period solely on the renter, this can be a disadvantage if the renter is unable to get financing. In this situation, loss of residence and loss of down payment could also occur.
Rent-to-own, when discussed and contracted properly between an honest landlord and a tenant with the means to make on-time monthly payments, can be a good thing. The landlord gains a tenant who is also a willing buyer and that bodes well for property upkeep. And the tenant has time to rebuild credit and make plans to buy the property while amassing a nice down payment. Both sides do need to seek good legal advice to make sure that a rent-to-own arrangement is mutually beneficial.
Sam Radbil is the lead writer for ABODO Apartments, an online real estate and apartments marketplace with available apartments from small cities like Springfield, Missouri to major metro areas like Los Angeles, California. ABODO’s research and writing has been featured nationally in Curbed, Forbes, Realtor.com, HousingWire and more.