December 8, 2022

Rent? Buy? Or maybe, both. Weighing the pros and cons of rent-to-own homes.

4 min read

You need to consider both advantages and disadvantages before moving forward.

A rent-to-own home enables you to start the process of purchasing a property.

You’ll enter into an agreement with the owner that either allows or requires you to purchase the home you’re leasing after a certain period of time. You’ll pay a higher monthly rent and some of the money will be set aside by your landlord and go toward acquiring ownership. Then, when the time comes to buy, you’ll already have equity. This can make getting a mortgage easier since that equity can help you reduce or eliminate the required down payment.

There are both benefits and disadvantages to this method of acquiring a home, and finance expert Dave Ramsey laid out both so you can make an informed choice.

These are the biggest benefits of rent-to-own

According to Ramsey, here are the biggest advantages of entering into a rent-to-home agreement in order to buy your home:

  • You won’t have to compete with other buyers. Your lease-purchase agreement will give you the right to the house as long as you comply with the terms. There’s no chance of a bidding war or losing out to another interested party. “That’s a huge relief given how competitive the housing market has been the last couple years,” the Ramsey Solutions blog reads.
  • You can negotiate the terms of your agreement. As Ramsey explains, there’s less regulation that applies to rent-to-own arrangements than to traditional real estate transactions. So you can ask for any terms and conditions you feel are appropriate. There’s no guarantee the seller will agree to everything you want, but you have much more control over deciding on the details of the transaction. Because of this, Ramsey recommends working with a lawyer to iron out the agreement.
  • You can put off trying to qualify for a mortgage. Getting a home loan is often the biggest obstacle to buying a property , especially if you don’t have great credit or a down payment. A rent-to-own arrangement allows you to start building up an ownership stake in a home while getting your financial ducks in a row to get a mortgage later. However, Ramsey warns that there’s also a risk to this because if you end up not being able to qualify for a mortgage when the time comes, the rent-to-own deal may fall apart and you may be out the money.

These are the biggest drawbacks of rent-to-own

While the advantages of rent-to-own may seem great, many people will find the cons outweigh the pros. Here’s what Dave Ramsey says are the downsides of rent-to-own plans.

  • Rent will be higher . You have to pay more since your landlord is setting aside some of the money from your monthly payment to help you build equity in the home.
  • Fees and maintenance expenses can add up. Ramsey explains that you usually have to pay an upfront fee to enter into a rent-to-own agreement. And you won’t get a refund if things don’t work out. And that may not be the only added cost. “Don’t forget — you may be responsible for all repairs and upkeep even while renting. Unexpected emergencies can burn a serious hole in your pocket for a house that doesn’t even belong to you,” Ramsey warns.
  • You could overpay. According to Ramsey, many rent-to-own agreements lock you into buying the property at a higher price than it is currently worth on the assumption property values will rise in the interim. If this doesn’t happen, you could be forced to pay more than the property is worth when it’s time to purchase it. This could create problems with the loan approval.
  • You’re out the cash if the deal falls through. Ramsey makes clear that if you end up being unable to purchase the property, you could lose a small fortune. “If you’re in a lease-option agreement, you can walk away from the contract. But what happens to all the cash you forked over in higher rent and option money? That’s thousands of dollars you won’t get back,” he explained.
  • Your equity in the home could be lost. Since the landlord is still the owner, they could end up getting foreclosed on and you could lose out. You could also be forced to incur legal bills if the seller tries to back out of the contract after you’ve already spent the money.

You should carefully consider these disadvantages before moving forward. You don’t want to make a choice you regret, and the downsides of rent-to-own are substantial. There may be better ways to buy a home, so explore all your options before rushing into a deal that may seem better on the surface than it is in reality.

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