When Is Rent to Own a Good Idea?

A rent to own option on a house or condominium may be something for you to consider the next time you are planning a move. While there is the possibility that this could be a good opportunity for you, it is a complicated process and may not be the best choice for everyone. Therefore, knowing and understanding the options and issues with rent to own deals will help you decide whether or not this strategy could work for your situation.

How Rent to Own Real Estate Works

A small percentage of houses for sale or rent are offered with a rent to own option. In a typical rent to own contract, you will agree upon a purchase price and timeframe for closing the purchase with the landlord seller. In addition, you will pay an agreed upon monthly rent, just like any property you would lease. However, in a rent to own situation, the monthly rent you pay will typically be an amount above the fair market rent for the unit you are renting. The amount that is above the fair market rent is usually held by the landlord and used as your downpayment when you purchase the property.

For example, the market rent may be $1,200 for the property you are moving into, but the landlord may offer a rent to own option where you pay $1,600 per month in rent instead. That additional $400 per month is held by the owner and adds up towards your downpayment on the purchase of the property. Let’s say 12 months go by and your downpayment balance with the landlord is up to $4,800. This means that if you eventually buy the property, that $4,800 will be credited to you when you close escrow on your purchase.

However, if you decide not to purchase the property after initially opting for the rent to own option, or cannot obtain financing to purchase it later, you would most likely lose your $4,800 balance when you vacate the property. That is the risk you must understand, as you lose that money if you decide to not purchase for any reason.

These agreements, though, can be structured in any form or fashion, so there is a chance that you might get your $4,800 back if the seller agreed to this in the original rent to own arrangement. Make sure you fully read and understand the terms of the contract if you are going to contemplate one of these, and use an experienced real estate professional and lawyer to help you negotiate a fair contract with the seller.

Facts About Rent to Own Deals.

Most real estate sellers, due to the high risk, are not going to offer a rent to own option unless they are going to earn above market returns on the agreement. This probably means that they are asking an above market price for the property based on current market comparables. Therefore, if you accept their proposed deal, you are probably paying above market price for the property – which is not advisable. Additionally, few of these deals actually close escrow because most of the buyers did not originally have the ability obtain financing for the purchase, and they still could not obtain financing a year or two into the agreement when they were required to purchase the property. This means that these buyers lost their downpayment.

Additionally, since rent to own deals make up a very small portion of the properties available for purchase, the likelihood that any particular rent to own opportunity is the right property for you for all the right reasons is pretty low. Rule number one in smart property buying and ownership is to only buy property if it is truly the best property for you, after factoring in location, price, features, size, condition, etc. After all, whatever property you buy will be yours to own for a long, long time.

Remember that while a rent to own option may initially seem like a great opportunity where you can save some money and end up being a property owner, once you think through the facts, there are a lot of reasons why it may not be that fantastic of a deal. For one, contrary to what you often hear others saying, renting is not "throwing away money." Buying a property that is not the right property for you and/or that you only own for a few years is more like throwing away money than simply renting. This is because there are lots of transaction costs you pay for in buying and selling property – and that is money you could be saving for the downpayment on the perfect property. But with all that said, if you just love a potential rent to own property for its particular features and not just because it's available as a rent to own, go for it! If not, you should save your own money for a downpayment on another property and ensure that your finances are in a position where you can get a traditional low interest rate and long term financing from a bank or mortgage lender.

Buying real estate is complicated and time consuming, and you do not want to risk your savings – the above market, non-refundable rent that is accumulating with the landlord – on a property where there is a very low chance you will eventually own it.

If you take the time to learn about property ownership and financing, you will find that it is tough to find a fair rent to own deal. Make sure to adequately study up about property ownership, as it is the largest and riskiest purchase you will ever make. You'll want to make sure that you take the plunge on the absolute right property for you for all the right reasons.