Advantages and Disadvantages of Rent-to-own Homes

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.

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A foreclosure sign sits in front of a home for sale in California.

Let's look at some of the 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 of their rent credit money, that amount will be much less than if the renter had bought the house outright and then 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 $400 rent credit each month. If the renter were late just three times each year, at the end of the lease period the renter would have $3,600 less for the down payment. Rent-to-own leasers must pay on time, every time.
  
• All of 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.

And what about the sellers? Here are some pros and cons they can expect:

• If home values are falling, sellers can lock in a higher price at the start of the agreement.
• Renters who are looking to own generally treat their living space and community better. They're planning for their future, instead of living in a place they will vacate in a year.
• If a renter does back out at the end of the agreement, the seller still has the option fee and rent premiums as income. However, the seller is back to square one, which may be difficult for some homeowners who just want to be free of their old house.
• If a new potential buyer comes along who wants to purchase the house for a higher price, the sellers are out of luck. They entered a contract with the renter, and they have to abide by it.

Many sellers use the rent they earn to pay the existing mortgage on their old home, which eases their financial burden. If the renter can't make payments, few sellers can afford to pay both their old and new mortgages, which could force them into foreclosure.

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