What’s the Deal With Rent-To-Own? The Term You’ve Been Hearing, But Know Barely Anything About

No one rents their house to sell to become a billionaire. The people that do it, are doing it to avoid going bankrupt. As in…it’s usually a last resort. For example, if the homeowner has to move for work (but possibly plans to come back), is going through some other life change, or they simply have been unable to sell their home due to the real estate market…the homeowner considers a rent-to-own situation.

If the homeowner has had to relocate, for example, this is a better option for him than having to pay two mortgages each month. It is a way for him to minimize the financial hit he’s had to take. The ideal candidate for a rent-to-own setup, is someone who really wants to buy a house but can’t because their credit is either lacking, or bad in general. Step by step, this is how a lease to own option works:

  1. You talk to your mortgage broker, and tell him you want to do a lease-to-own for your house. After the lender approves that, the prospective buyer gives you a non-refundable deposit that will go toward the down payment of the home.
  2. The buyer rents your home for a said amount of time (usually 2-3 years); during which period, they pay a monthly rent. A small portion of that rent also goes toward the down payment for the home.
  3. After that 2 or 3 years (depending on the contract), the renter has the option to purchase the house, with all of the money they’ve put down going toward the purchase price. Since usually, the money they’ve been putting toward it is significant, they’ll go for that option. If they don’t buy it, the seller keeps the down payment money. 

See how that works? It almost never works out to the buyers advantage. However, it is smart on the seller’s side. The most logical situation is that after those 2-3 years, the buyer still can’t get a mortgage approval from the bank to purchase your house.

Another potential pitfall is that the renter has trouble paying you; this is probably the worst possible scenario, since you still have a mortgage to pay. You can’t kick out the tenant like you normally would be able to if it were strictly a lease. So, in this case, lawyers are brought in and many different parties get involved. It’s also possible that the renter can destroy your house; for example, they can ruin the carpet, the floors, or the walls. If they end up purchasing the house, who cares? But if they don’t purchase the house, it’s pretty bad news.

The problem with a lease-to-own situation is that buyers tend to treat the house as if it’s already theirs. When a tenant is solely a tenant, they treat the house with more respect, because they want their deposit back. On the other hand, the rent-to-own-er may treat your house better than a regular tenant, since they want it to be in nice shape when it’s officially theirs. It really depends on the person, and how they treat their possessions.

Finding a Buyer

If you really do want to lease your home to sell, you’ll have to search for people who are looking for the same thing. Craigslist is a great place to advertise. Renting to own has been around for quite some time, but you don’t hear it discussed much; mainly because it has a bad rep. The general reputation of the term is a seller taking advantage of an ignorant buyer.

If you’re going to become involved in this situation, you need to understand exactly what it means, legally. This means that you should take the following steps:

  • Get a mortgage broker involved from the get-go. Since they have experience, let he or she decide if they think the potential buyer looks like a good candidate, and that their future seems promising in the sense that they’ll be able to afford the house after the 2-3 years. Don’t rent-to-own your home to some random person off the street that works as Walgreens.
  • Have a real estate attorney review the agreement.
  • Work with a real estate agent who has thorough experience with this type of lease.

Check out this article by Home & Garden on, How Rent-To-Own Homes Work.

Comments 2

  • Both renters and sellers need to be very clear about the contract they draw up before they agree to this arrangement. Renting-to-own has advantages and disadvantages for both parties. Sellers who have already bought a new house will have relief from paying two mortgages at once, and in a slow housing market with many homes for sale, this may be their best option.

  • I would never rent to own. From what I understand, the sellers end up benefitting way more than the buyers in the long run.

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