Rent-to-own is a real estate agreement where a tenant leases a home with an option or obligation to purchase it at the end of the rental period.

A Longer Definition: Rent-to-Own

Rent-to-own is a contractual agreement between a renter and a landlord where a renter pays rent monthly while the lease is in effect and has an option or obligation to buy the home when the rental period concludes.

Rent-to-own agreements typically consist of two parts: a standard lease agreement and an option to purchase. The terms of the agreement, including rent amount, length of the rental period, and purchase price, are agreed upon at the outset. The renter and owner may also agree for a portion of the renter's monthly payment to be applied toward a down payment for the eventual purchase of the home.

Rent-to-own may appeal to first-time home buyers because it allows them to "test" a home before committing to buy it, while also allowing time to build credit, save for a down payment, and improve their financial situation. However, rent-to-own contracts often favor the landlord, which can create risks for the renter.

Before entering a rent-to-own contract, home buyers should review the agreement with a real estate attorney. It is important to know that payments or rent credits toward the home's purchase price may be forfeited after a single late payment or for other breaches of the contract.

Rent-to-Own: A Real World Example

Imagine a first-time home buyer interested in a home but unable to get pre-approved for a low-down payment mortgage because of a recent bankruptcy.

Instead of buying a home outright, the buyer enters a rent-to-own agreement with a willing home seller, setting a future purchase price and agreeing to rent the home for two years, with a portion of the rent payments applied toward the purchase price.

After 24 months, the home buyer re-applies for a mortgage, gets approved, and the rent credits are deducted from the agreed-upon price as part of a successful purchase.

Common Questions About Rent-to-Own

What are the benefits of a rent-to-own agreement for first-time home buyers?

Rent-to-own agreements offer first-time home buyers an opportunity to live in a home before buying, save toward a down payment through rent payments, and lock in a purchase price at a pre-determined amount.

What are the risks of a rent-to-own agreement?

The risks of a rent-to-own agreement include losing the money invested toward the purchase if the option to buy is not exercised. Rent-to-own agreements may also have higher monthly payments compared to standard rental agreements, and the renter may be obligated to buy the home even if its value decreases.

How does a rent-to-own agreement affect a buyer's credit?

A rent-to-own agreement does not directly affect a home buyer's future credit score unless the landlord reports on-time rental payments to the three major credit bureaus.

Can a buyer negotiate the terms of a rent-to-own agreement?

Yes, terms like rent amount, duration of the rental period, and purchase price are negotiable in a rent-to-own agreement, similar to other real estate transactions.

What happens if the property's value changes during the Rent-to-Own period?

If the property's value increases, the buyer benefits by having locked in a lower purchase price. However, if the value decreases, the buyer might end up paying more than the market value unless there are terms in the agreement allowing for renegotiation.

How do I find a rent-to-own home?

To find a rent-to-own home, start by filtering online real estate listings for "rent-to-own" and ask a real estate agent to help identify available rent-to-own properties. Research and verify the legitimacy of any rent-to-own arrangement before proceeding.