Advantages & Disadvantages of Rent-to-Own Agreements

One of the many options new homebuyers may encounter in their search is a rent-to-own agreement. These agreements allow the prospective buyer to rent a property with the option to buy it down the road. There are many types of rent-to-own agreements, each with their own rules and exceptions. Here is a breakdown of the major advantages and disadvantages of this type of contract you should consider.

Rent-to-Own Pros

• A Good Option for Bad Credit - If you can’t qualify for a home loan or other types of financial help, rent-to-own agreements might be an excellent choice. With regular on-time rent payments, you can even improve your credit score over time while renting. This makes it easier to get loan approval when it’s time to buy the home outright.

• Lock in Purchase Price - If you’re looking for a home in an area with rising property values and prices, renting-to-own may give you the option to buy at the current purchase price and save a bundle. This way you can reserve your spot in a hot market affordably.

• Test Out the Property & Neighborhood - Renting-to-own gives potential buyers the chance to try out a home before committing to buying it. This gives you time to learn about the property and the neighborhood and can give you greater peace of mind in your decision.

Rent-to-Own Cons

• Possible Financial Loss - If you decide not to buy the home at the end of the rental period, you’re out of a considerable amount of money. You won’t get a refund of your investment and will need to begin the process all over again with a new property.

• You’re a Tenant, Not an Owner - Since you’re technically renting the property, you face all the potential woes of the renter lifestyle. This can include minor annoyances like rules about customization and remodeling but also potentially serious scenarios like the landlord defaulting on their mortgage and losing the property through foreclosure.

• Unpleasant Surprises - Renting a home before buying it will help you learn about potential issues with the property and home itself, like neighborhood noise, plumbing problems and more. However, there are some things you won’t learn until you actually buy the property, such as problems with the title.

Rent-to-own agreements can be an excellent option but also come with risks. If you’re considering renting-to-own, consult a financial advisor or real estate attorney to help you make the smartest choice for your situation.