Better Off Investing?
There are several ways in which a renter could invest the money that ultimately goes toward the down payment in a rent-to-own deal. Based on the previous example, the renter would make only about $350 to $450 by investing the $12,200 in fees and premiums in a savings account (average annual percentage yield: 1 percent) or three-year certificate of deposit (average interest rate of CD: 1.2 percent). Investing the money in stocks or mutual funds could significantly increase the renter's nest egg, which could then be used to make a larger down payment. Such a return -- which, unlike that of savings accounts and CDs, isn't guaranteed -- would turn the renter's $12,200 into $14,640. For some renters, the ability to lock in a home's price in a rent-to-own deal is worth passing on other investment opportunities [sources: Bankrate, Dow Jones Indexes].
Alternatives to Rent-to-Own
Given the pros and cons for both buyer and seller in a rent-to-own deal, both parties should also consider alternatives to this transaction.
Wraparound financing is an alternative often used where the seller has a mortgage on the home and the buyer has sufficient income but, for a variety of reasons, is unable to obtain a mortgage. The buyer makes a down payment at the time of the sale and signs a promissory note to the seller for the remainder of the purchase price, plus interest. The buyer then makes monthly payments to the seller, who uses that money to pay off the existing mortgage. This type of financing saves each side closing costs and allows the buyer to make more money by charging an interest rate slightly higher than that of the existing mortgage. Of course, both sides remain vulnerable: The seller needs the monthly payments to pay off the mortgage, and even if the buyer pays on time, the home can be foreclosed on if the seller does not make mortgage payments [source: Kass].
Under a land installment contract, the seller agrees to transfer the title to a home and the property it sits on only after the buyer has met certain conditions specified in the contract, typically the payment of the purchase price plus interest. This type of agreement is commonly used where the buyer is capable of making only a small down payment and smaller monthly payments. In this situation, there is no mortgage, or the existing mortgage is being paid by the seller, who must pay it off before transferring title to the buyer. The buyer should ensure that the seller does in fact own the property before entering a land installment contract. As with rent-to-own, the buyer is typically responsible for repairs to the property and may also be expected to pay property taxes and homeowner's insurance [source: Southeastern Ohio Legal Services].
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