In a rent-to-own arrangement, the buyer should be aware that if the seller fails to pay the mortgage on the house while it's being rented, it may be foreclosed upon and the buyer forced to move.

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Risks and Benefits to Buyers

For many people, a home will be the biggest purchase they ever make. Both buyers and sellers should carefully weigh their options before agreeing to any binding contract. Let's look at some advantages and disadvantages for buyers:

  • Buyers have time to build income and repair their credit history as they rent the house.
  • Depending on the agreement, renters can walk away if they find something seriously wrong with the house. Although the renter will lose the option fee and all their rent credit money, that amount will be much less than if the renter had bought the house outright and tried to leave it later.
  • Buyers still have to pay the upfront option fee. It's usually a percentage of the agreed-upon selling price of the home and is often thousands of dollars. Although this money will go to the down payment should the renter decide to buy the house, it can still be difficult to accumulate that much money before renting.
  • If the buyer is just one day late on a month's rent payment, most agreements void the rent credit for that month. Think about the previous example, where the three-year renter received a $200 rent credit each month. If the buyer paid the rent late just three times each year, at the end of the lease period, the buyer would have $1,800 less for the down payment. The buyer in the rent-to-own agreement must pay on time, every time.
  • If the seller fails to pay the original mortgage on the house, it may be foreclosed and the buyer forced to move.
  • At the end of the rental period, the buyer still may not be able to buy the home for the same reasons they couldn't buy at the start of the lease: bad credit, insufficient down payment, not enough income.

All those repairs that used to be somebody else's problem in a rented apartment often become the responsibility of the new buyer, even during the rental period. Whether it means climbing on a ladder to unclog the gutters or having to pay for a new washing machine when the original washer breaks, the renter has to take care of it.

If you're the seller in a rent-to-own arrangement, the next page discusses the ins and outs of the deal from your perspective.