How Does Rent-To-Own Work?

renting to own

Rent-to-own is a rental agreement in which a property is leased, yet part of the money paid weekly or monthly goes to owning the property after a certain amount of equity has been accumulated. Rent-to-own is different from a regular lease agreement, in that the renter can buy the property at any time during the agreement (in a traditional lease agreement the renter has no such right).

Another similar agreement is a hire purchase/installment plan, in which the renter can also terminate the contract anytime by simply returning the property to the owner (traditionally the buyer of a property has limited time, if any, to cancel the contract).

How Can You Get a Rent-to-Own Property?

Getting a rent-to-own property can be difficult for many reasons, but here are a few tips that should make the process easier.

  • Find a real estate lawyer to draft the kind of agreement you want, but don’t get it drafted until you find someone who is willing to do a rent-to-own agreement.

  • The way to find someone who is willing to do a rent-to-own is by either talking to a realtor or even talking to the owner of the property themselves, like FSBOs (for sale by owner). There are dedicated websites for people who want to sell their homes without realtors. Realtors will often try to talk you out of doing a rent-to-own because these kinds of contracts tend to get complicated very easily. Plus, it’s harder for the realtor to get paid a commission from this kind of a contract. So your best bet is usually a FSBO website. One very important tip you should always remember is that everything in real estate is negotiable -- which means there are endless possibilities.

Why Do People Choose A Rent-to-Own Agreement?

  • Usually, people who take the option of a rent-to-own agreement don’t get qualified to take out a home loan, so they try to find a property where the seller would be the bank in terms of financing (seller financing). In most of these cases, a 20-30% down payment would have to be put down, which is slightly higher than bank financing.

  • Rent-to-own is often a choice when the renter has bad credit because they deal directly with the owner of the property. Also, this does give the renter time to fix their credit so that they can apply for a loan and get their dream home sooner.

  • People love the perk that even though they are technically renting, a portion of their rental money goes towards owning the property.

Keep in mind, it doesn’t always have be the seller who finances a rent-to-own agreement; it could be a third party investor who has entered into an agreement with the buyer. This can allow you to avoid the trend that rent-to-own sellers generally set their prices higher to cushion themselves from their home’s market value going up during the contract. While investors may do this too, it may not be as pronounced.

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