Scenario: A buyer is eager to purchase a home, but needs more time to qualify for a mortgage. A seller is eager to generate income on a vacant property. For this buyer and seller, a rent-to-own contract may be an attractive alternative to an immediate transaction.
Offered by individual sellers, and occasionally by developers of multi-unit properties, rent-to-own contracts typically include an up-front fee, plus monthly payments comprised of two components—rent and additional charges that count towards a down payment.
For example, assume you agree to buy a $195,000 home, paying $3,000 up front and monthly payments of $1,400 ($400 of which accumulates toward the sale price). At the end of a one-year contract, you'd accumulate $7,800 towards a down payment; $17,400 after three years.
But if you decide not to proceed on the purchase, it is unlikely that any of your beyond-rent payments will be refunded. For this reason, buyers should only consider a rent-to-own option if they are very serious about purchasing a home, but need more time to arrange financing or have other legitimate reservations.
Rent-to-own contracts may be a good choice if:
- A buyer wants to take advantage of an attractive selling price, but needs more time to save enough for the down payment.
- An interested buyer needs time to improve their credit history and qualify for a better mortgage interest rate.
- A buyer wants to make certain a house has no serious flaws, or wants to experience living in a neighborhood before becoming an owner. If this buyer decides not to proceed, they may forfeit the money credited to a purchase, but these losses could be small compared to the potential cost of multiple real estate transactions and/or property repairs in order to resell the house and find a different home.
In all cases, buyers should plan carefully and make every attempt to ensure they can complete a purchase transaction at the conclusion of the contract. It's also essential to work with a qualified real estate attorney to make sure the contract terms are favorable to your needs and the seller is a legitimate owner.