Thursday, March 16, 2023 / by Steve Ticknor
When first starting out living on their own, many people rely on hand-me-downs from their parents, second-hand stores, or used furniture purchased on places like OfferUp or Facebook Marketplace to furnish their abodes. After all, new furniture can cost a pretty penny. Other people turn to those rent-to-own shops. Did you know that this might be a viable alternative to the traditional way of buying a home as well? It's true. But it comes with some pros and cons.
Rent-to-Own: Real Estate Edition
How Rent-to-Own (aka "Lease Purchase) Works
In this situation, you sign a lease with the owner of the house agreeing to pay a certain amount per month for a specified period of time. At the end of the lease, you agree to buy the home outright. Part of your lease payment gets set aside to use toward your down payment at the end of the lease period. However, a few things need to be clarified before entering this agreement.
What to Discuss Before Signing on the Dotted Line
First, will this be a lease option or a lease purchase? A lease option means that you get first dibs on buying the property at the end of the lease. If you decide to opt out of buying it, the owner can then put it on the market. On the other hand, a lease-purchase means that you enter into the lease with the understanding that you plan on buying it outright at the end of the lease term. If you change your mind, the seller may end up keeping all money paid towards the down payment. Second, what part of your monthly payment is actually rent and how much goes toward your future down payment? Next, where will those additional funds be deposited? They need to be kept in an account completely separate from the monthly lease payment. Then, who pays for maintenance during the leased timeframe? That includes regular upkeep (lawn care) as well as larger issues (plumbing or electrical repairs, etc).
Who Should Consider This Option?
The rent-to-own/lease-purchase option is not for everyone. Only consider this option (if available) if you fall into any of the following categories:
- Are thinking about buying a home but aren't sure if you're ready for it yet (test drive homeownership)
- Want to buy a home but aren't sure about the neighborhood
- Would rather some of your monthly rent go toward possible equity
- Don't have a good-sized down payment saved up yet but know that you want to own a home
- Have a lower credit score but are working on improving it right now
If none of those scenarios fit your circumstances, this may not be the option for you. But if any of these sounds like the situation you face right now, make sure you do your due diligence before you sign any paperwork. Watch out for scams. Have a home inspection and appraisal done before entering into any agreement as well. After all, you may become the homeowner. You need to know what you're getting into.