The term “rent-to-own” gets thrown around quite a bit. There’s rent-to-own furniture, rent-to-own cars, and even rent-to-own computers. But what does it mean when we talk about renting-to-own a home?
Rent-to-own is sometimes also referred to as a lease option. Basically, it works like this: you sign a lease agreement with the owner of the property. It’s usually a standard lease agreement. You put down first and last month’s rent and a security deposit. Then, almost as if it is a second transaction, you’ll sign a contract locking in the terms of the rent-to-own options and the final price of the house. You’ll also need to put money down on that transaction (it’s the down payment for the house).
The terms you’d agree to in a rent-to-own scenario may look something like this:
You put $8,000 down and lock in the purchase price of the house for 24 months. Meanwhile, you’ll be paying rent on the property. The rent you pay usually does not go toward the principal. (Although, I can usually work with my clients and adjust the figures in ways that make sense for both of us.) At the end of 24 months, you obtain financing and close on the house, just as you normally would. The $8,000 serves as the down payment and is subtracted from the amount you need to finance. Sometimes, it is also possible to agree to pay more than the lease price per month and have that amount applied to the principle. (At Angie Buys Houses Central Florida, we’re always open to allowing clients to contribute to the principle by paying over & above the lease agreement each month.)
So, what’s the benefit?
That depends on your circumstance and the housing market. Here are some possible scenarios in which a rent-to-own agreement would be beneficial:
Your credit isn’t quite where you need it to be. You may want to buy a home, but your finances may not support that decision just yet. A rent-to-own agreement gives you time to get your finances in order, pay down debt, and build credit before you apply for a mortgage. Angie Buys Houses Central Florida reports all lease payments to the credit bureau to contribute to your growing credit score. We’re also willing to provide verification to lenders that you’ve made rent payments on time to help you secure a mortgage.
You want to lock in the price of the house. There are lots of reasons people aren’t ready to make the final leap into a house purchase. But if you know where you want to be and you think you’ll be ready in two to three years (the typical length of a rent-to-own agreement), it makes sense to lock in the price of the house with a down payment. Then, if the market continues to heat up, you could be looking at paying less than market value for your home.
You lock in the price of the home, and then housing values drop. A lot. How could this be a benefit? Well, if you put down $8,000 on a home that cost $100,000, and then—due to market variables—that home is only worth $50,000, you can choose to back out at the end of your rental agreement. Yes, that means that you’ll lose the $8,000. But, if you’d bought the house, you would’ve lost $50,000 in equity. In this case, the rent-to-own scenario works as a failsafe, protecting you from a bad investment.
Renting-to-Own makes the path to homeownership more accessible. It works well for some folks. And it’s an option to consider if you lack the credit score and/or down payment to take the typical route to homeownership. Keep in mind that the terms of rent-to-own agreements are specific to both the leasee and the property owner. Angie Buys Houses Central Florida always works with you to find an agreement that will get you one step closer to owning your own home.