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Considering a Rent-to-Own Home? Here’s Everything You Need to Know

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You’re looking to purchase your very first home, but there’s a problem: Your finances aren’t where they need to be. Perhaps your credit is sub-optimal. Or maybe you don’t have enough money for a down payment.

If this is the case, a rent-to-own home, also referred to as a lease-to-own home, could be a good solution for you.

Rent-to-own homes have their own challenges and pitfalls, however. That’s why we’ve explored the ins and outs of this housing option for you. Read on for everything you need to know about rent-to-own homes.

What is a rent-to-own home?

In rent-to-own home agreements, a tenant pays a certain amount each month (just like rent), and a portion of that goes toward the down payment on the future purchase of the home. You’re essentially building equity in your home in anticipation of purchasing it later on.

In these agreements, the person or company who owns the property agrees to a future sale price ahead of time, according to the Federal Trade Commission. The amount of time a consumer has before actually buying the property can be anywhere from a few years to a few decades.

Rent-to-own agreements can be complex, but there are two primary types:

Lease-option agreement. Under this agreement, a tenant can purchase the home when the lease expires. There is no obligation to, however, and the decision is up to the tenant.

Lease-to-own agreement. With this agreement, a tenant agrees to purchase the home when the lease term expires. Tenants under this agreement are legally bound to purchase the home once the lease ends.

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Who seeks out rent-to-home homes?

Typically, rent-to-own homes are pursued by people with poor credit or not enough money for a down payment, said Lisa Wise, owner of three real-estate companies in Washington, D.C.

People in very expensive real estate markets who can make a monthly payment, but can’t afford a down payment, could also benefit from a rent-to-own situation, Wise said. Rent-to-own homes can also be favorable for consumers who are renting a home and have fallen in love with the property but aren’t quite ready to purchase it yet.

“A rent-to-own agreement kind of helps you achieve that path without having a huge amount of money to plop down,” Wise said.

The FTC warns consumers, however, that the rent-to-own industry is rife with scams. In the past, they have seen everything from owners who didn’t really own the home to owners who hadn’t paid property taxes or maintained the house. Because of these potential scams, people interested in rent-to-own agreements must be vigilant and do their due diligence before securing a deal.

How to find legit rent-to-own opportunities

Rent-to-own homes can either be owned by a large corporation or by an individual interested in helping a current tenant buy the property in the future, Wise said. If you’re interested in pursuing a rent-to-own home, make sure you’re dealing with a person or company that is legitimate.

The National Home Buyer’s Alliance is one place you can begin your search. This program helps people who have financial problems secure a home using the rent-to-own process, operating out of Atlanta, Chicago, Dallas, Houston, St. Louis and Kansas City, Mo.

Another place you can look is Home Partners of America. This organization allows participants to partner with a realtor to find a qualified home. Home Partners of America then leases that qualified home to the consumer, who has the option to purchase it in the future if they’d like. This organization operates in numerous cities across the U.S.

Many rent-to-own home agreements are done through homeowners without a company backing them. If you’re unsure whether a prospective opportunity is legitimate, contact a local nonprofit housing agency for assistance.

Rent-to-own contracts are not standardized and vary based on the particular situation. This is why Lorena Peña, who chairs the board of the San Antonio Board of Realtors, recommends consumers have representation when pursuing a rent-to-own home.

“The No. 1 thing I would tell people is they need to have representation, be that a realtor or an attorney, to make sure what they’re doing is working with somebody who has their best interest at heart,” Peña said.

Wise agrees — “You want to be really careful about what you’re doing,” she said. “So if you can, you should always engage an attorney before entering a lease-to-own option.” If you cannot afford an attorney, Wise advised contacting a local legal aid program that can help you review the contract.

Warning signs in rent-to-own deals

The rent-to-own market is full of scams and potentially predatory behavior. “The main message is buyer beware,” said Bruce McClary, vice president of communications at the National Foundation for Credit Counseling.

Rent-to-own situations are often problematic because there is not much government oversight. One 2016 study from the National Consumer Law Center found that following the recession, some investment firms targeted unsophisticated buyers with rent-to-own agreements and then profited off of them.

McClary and Wise offer the following advice for assessing whether a rent-to-own situation is legitimate or not:

  1. Pay attention to rent. Watch what you’re being charged during the rental period, McClary said. This way, you’ll know exactly what is going toward your future down payment.
  2. Look at the lease terms. Scrutinize terms written into the lease or purchase option that might be detrimental to your financial situation, McClary said. This could include provisions stating that if just one payment is missed, the entire deal is off, meaning you would lose all of the equity you’d built in the home.
  3. Ask questions. This includes how long the purchase option period is going to be and how much money you’re putting away toward the down payment during this period, McClary said.
  4. Think about the home’s future. Keep your eye on what the market value of your home is going to be a few years from now when you’re ready to buy, McClary said. If the market value for homes in the area is dropping, you might want to reconsider the property before you’re locked into a sale price.
  5. Research the company you’re doing business with. Look at their online reviews, Wise said. You can also check with the Better Business Bureau and see how long they’ve been in business and what their track record might be.

If you think your rent-to-own situation is troublesome, or that the person or company you’re dealing with is exhibiting predatory behavior, McClary recommends filing a complaint with the local housing authority where you’re renting.

The FTC warns consumers that there are also potential pitfalls even in legitimate rent-to-own deals, which could include high upfront fees and higher monthly payments than you’d pay if you were renting traditionally.

Alternatives to rent-to-own homes

Rent-to-own homes aren’t always ideal. Not only is the industry full of fraudulent behavior, but even legitimate situations come with their potential downfalls. What if your credit isn’t in good enough shape to secure a mortgage when it’s time to buy the home? What if property values have dropped in your area? What if the home’s value decreases?

McClary said he typically warns against rent-to-own homes. “I think the preferred option for people with damaged credit who are looking to buy a home is to focus on the things that are going to get their credit back to where it needs to be so that they can enter the market as a homebuyer without going through a rent-to-own situation,” he said.

If you’re a first-time homebuyer with a less-than-stellar financial profile, the following are other options worth considering before a rent-to-own home.

First-time homebuyer programs

There are myriad national programs that help first-time homebuyers. FHA loans from the Federal Housing Administration and VA loans from the Department of Veterans Affairs can both help first-time prospective homeowners. There are also local and state organizations across the country that can help first-time homebuyers.

Bad credit homebuyer programs

FHA and VA loans can also be beneficial for those with poor credit. Consumers with bad credit can also get assistance through the Fannie Mae HomeReady program. People in rural areas can look into USDA loans provided by the U.S. Department of Agriculture.

In addition, law enforcement officers, teachers, firefighters and emergency medical technicians might be eligible to participate in the Good Neighbor Next Door program from the U.S. Department of Housing and Urban Development.

Contact a nonprofit credit counselor or housing agency

For consumers who are very close to having the credit and/or down payment they need to purchase a home, McClary advises they contact a nonprofit credit or housing counselor to help them improve their credit instead of jumping the gun and signing a rent-to-own agreement.

“A lot of people are surprised to find, after talking to a counselor, that they can go from [being] just outside of the housing market — in terms of the health of their credit and their financial situation — to being home ownership ready within 18 to 20 months, with just a little bit of guidance from a housing and credit counselor,” McClary said.

Installment contract

An installment contract, also known as a contract for deed, involves a seller financing the home sale, according to the Federal Reserve Bank of Minneapolis — that’s opposed to the traditional route, where a third party, like a bank, finances the sale. Instead of purchasing the home outright, the buyer pays monthly installments.

Although this method can allow a buyer to purchase a home he or she might not have been otherwise able to, the buyer isn’t allotted many protections, and can lose all stake in the home by defaulting on just one payment. Take special precautions before going this route.

The bottom line

If you have decent credit and almost enough money for a down payment, you might want to hold off on pursuing a rent-to-own home. Instead, spend some time working to build up your savings and improve your credit so you can enter the traditional homebuying process.

If you have very poor credit or not nearly enough savings for a down payment and have found a legitimate rent-to-own home, then it might be worth pursuing. It can also be worth considering if you live in a particularly expensive market that is prohibitive to home ownership.

If you do pursue a rent-to-own home, Wise says to make sure you’re doing it for the right reasons and pursuing a home that would meet your true needs.

“I’ve seen people who are like, ’Oh, I’m in a rent-to-own situation for a three-bedroom house when actually a one-bedroom would’ve been better,’” she said. “Just like any ownership opportunity, you want to think far enough ahead to ask yourself: Is this going to be the right situation for me a year from now, five years from now, 10 years from now?”


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