Is it a good idea to rent-to-own a home?

While home-ownership has long been romanticized as part of the American Dream, the truth is that many people can’t afford the down payment that buying a home typically requires. For that segment of the population, renting-to-own a home is an option.

But are rent-to-own homes a good path to home ownership? In this article, we’re going to explain how the rent-to-own process works and whether it’s a good use of money.

How do rent-to-own homes work?

The basic idea behind the rent-to-own process is that the tenant pays market rent, plus an additional amount of money that goes toward the deposit for a down payment.

The contract in a rent-to-own agreement usually falls into one of two categories:

• Lease option agreement: As the name suggests, in a lease option, the renter has the option to buy the home at the end of the contract.
• Lease purchase agreement: With a lease purchase, the agreement stipulates that the renter must buy the home at the expiration of the contract.

Rent-to-own agreements can last a matter of months or years — it’s up to the tenant and landlord.

With a rent-to-own property, many times the tenant takes better care of the home because they have a vested interest in its future.

Because these sorts of contracts can vary quite a bit based on the parties, what’s listed in the agreement — how long the contract is, who pays what at closing — is crucial to its success.

Clark’s take: Should you rent to own a home?

Money expert Clark Howard has some insight on rent-to-own agreements, and if you’ve been considering one, you might not like what he has to say:

“They almost never work out.”

Clark says that’s because the rent-to-own process typically appeals to a certain type of person: Someone who can’t qualify for a mortgage.

The thing with a rent-to-own is that “18 months later, they still may not be able to qualify for a mortgage,” Clark says.

At that point, not only are they not able to by the house, “they’ve also paid above-market rent.”

Clark says there are three things you need to consider before you enter into an agreement for a rent-to-own home:

• Be realistic about your credit situation: “You have to be realistic that you’re actually going to be able to improve your credit standing enough to be able to qualify for a loan 18 months (or whatever the contract period is) later.”
• Think before you agree to pay higher rent: A rent-to-own typically requires you to pay above-market rent. In most cases, that won’t get you out of the hole. “You’ve basically been conspiring against yourself because you’ve been paying above-market rent,” Clark says.

The bottom line is that before you agree to a rent-to-own home, you should have a clear understanding of your financial goals and whether they’re in reach.

Clark also says that if you do decide to go the rent-to-own route, make sure your agreement is up to snuff.

“A big mistake people make is that they go get an office supplies store boilerplate lease or one online,” he says. “Both sides really need a lawyer representing them to make sure the agreement is fair to both parties and isn’t going to blow up.”

How to find rent to own homes

Rent-to-own homes can be found in virtually any market. The key is to do your homework on the front end. Here’s what you should always do before you sign:

• Research: Look up the property taxes and research the seller as well.
• Contact a Realtor: Few people know the ins and outs of a listing or neighborhood like a real estate agent.
• Get legal help: As Clark says, hire a lawyer to hammer out the contract.

Want more help with buying a home? Check our our guide: How to buy a house in 9 steps.