3 Reasons You Should Think Twice About Rent to Own Programs

how does rent to own work

My husband and I were casually house shopping one time and came across the perfect home. It was fairly new, had plenty of updates, and was in our dream area.

But at $199,000, it was way over our budget. And, there was no way we could come up with a 20 percent down payment quickly. Ever helpful, our realtor suggested we check out a rent to own program.

At first, it seemed like a miracle solution. But as we did more digging, we realized it just wasn’t for us. Find out what rent to own programs are below, and why we decided to pass on the opportunity.

What is rent to own?

Rent to own home programs are a path to homeownership for people with bad credit. Or, for people like me, who do not have enough money saved for a down payment.

For either reason, lenders are typically unwilling to approve you for a mortgage large enough for the home you want. But rent to own programs allow you to get the home you want right now without a loan.

Additionally, rent to own homes refer to regular houses that are on the real estate market. Under most rent to own home programs, the company will work to buy houses for sale from individual sellers.

How does rent to own work?

In many rent to own programs, the company works with you to find a house you like and then they buy it outright.

As the owner of the home, the company leases it to you and serves as your landlord. That way, you can start living in your dream home right away, even if you cannot buy it yourself.

As a renter, you sign a traditional lease and pay monthly rent, just like you would when renting an apartment. But unlike your typical lease, you can opt to buy your home once you’re ready.

In some programs, the company will charge higher rent than the market rate. Then the additional cash is put towards an eventual home purchase.

However, if you decide you do not like the house or the neighborhood, you forfeit the additional amount you pay.

In other programs, none of your rent goes towards the purchase price. You simply live in the home and have the first right to buy the house.

3 major drawbacks for rent to own programs

The house my husband and I found really was perfect. And the idea of renting it and getting to make it our home while we saved seemed like a brilliant idea.

Only one company would offer a rent to own program for the exact house we wanted. And with that program, none of the rent went towards the home.

Instead, we had up to five years to live in the home and then we could decide whether or not to live there.

I liked the idea of not paying extra towards the purchase price because that meant we could walk away without losing out on a ton of money. But when we were trying to figure out “how does rent to own work” we came across some drawbacks.

1. Higher than average rent increases

When you sign a lease with a rent to own company, the company will outline the rent prices for the maximum amount of time you can lease.

In the program we were looking at, you could lease the home for up to five years, signing a one year lease at a time.

However, every year the rent would go up six percent. That’s nearly double the national average for rent increases. Since companies are making a huge investment with rent to own programs, they charge higher than normal rent to offset some of their risks and ensure a profit.

Make sure you take a look at what comparable rental rates are for your area before signing up with a rent to own program. You may find that you are paying hundreds more to rent a house just so you can have the right to buy it.

2. Continual purchase price increases

In addition to higher than normal rent, rent to own companies also decide on pre-determined purchase prices for the home.

In our case, after the company bought the house for $199,000, they laid out the following terms:

  • If we purchased the home within one year of signing a lease, we would buy it for $209,000.
  • Within two years, we would pay $219,000.
  • After three years, we would purchase it for $230,000.
  • If we decided to buy it after four years, it would be $241,900.
  • And after five years, it would be $254,000.

The company calculated a five percent annual increase for the home. While that increase is fairly normal for the housing market, it’s set in stone. And if the market crashes, or if the neighborhood goes down in value, we’d still be stuck at the pre-determined price.

For example, let’s say in three years we decided we were ready to buy. But the market takes a hit, and a similar house across the street sells for just $160,000. We wouldn’t be able to negotiate the price down; we’d have to pay the pre-agreed $230,000 or walk away.

3. There’s no guarantee of financing

Finally, just because a rent to own company agrees to lease out a home to you is no guarantee a mortgage company will give you a loan later on.

It’s important to note that rent to own companies do not offer financing themselves. Instead, you have to get a loan through a bank or other financial institution on your own.

And even if you keep up with the rent payments and love the home, you may not be able to get a loan. Which means that after the maximum lease term, you have to leave your beloved house and lose out on all the money you’ve invested into it.

Rethinking rent to own

Rent to own sounded too good to be true, and for us, it was. When we figured out the answer to “how does rent to own work” we realized it wasn’t a financially sound decision.

We decided taking the risk and spending the extra money to get a home right now was not a good idea.

Instead, we’ll keep saving up for it. That way when the next dream home pops up, we can afford to buy it the traditional way.

For more information about buying a home, check out this article on seven smart tips for finding the right mortgage company.

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Published in Buying a House, Mortgage, Renting