Rent-to-own Homes: How it Works, the Pros and Cons

For many, homeownership is a life-long dream that, at times, may seem impossible to achieve. Last week, we discussed the different ways in which millennials are becoming homeowners. This week, let’s take a deeper look at one of the options, rent-to-own homes - how it works, the pros, and the cons. Many people who are interested in becoming homeowners aren’t financially prepared to take on a mortgage. When the upfront downpayment requirements are very high, rent-to-own homes are an excellent alternative to access homeownership.

The financial burden and pressure of purchasing a home are enormous. Done correctly, rent-to-own allows you to ease into homeownership without having to lock away all your savings at any one point in time. More importantly, it enables wealth-building while postponing taking on additional debt in the form of a mortgage.

How do rent-to-own homes work?

Rent-to-own is the process in which you lease a home with an option to purchase it in the future. When entering into a rent-to-own agreement, the owner agrees to not place the home on the market to be sold. As the tenant, you have the first right to purchase the home during the term of the lease. The agreement will clearly lay out the monthly lease payment, the future purchase price of the home, allowed time of purchase, and any special terms. Rent-to-own programs also allow tenants to build up credits or options that can be applied towards the purchase of the home they are renting.

There is an alternate version of rent-to-own which involves a lease-purchase agreement, in which the tenant is contractually obligated to buy the home. In this article, we focus solely on the version that involves lease with an “option” to purchase.

Pros of rent-to-own homes

Rent-to-own allows aspiring homeowners to rent the home of their dreams while they prepare themselves for the responsibilities and expenses that come with homeownership. And it comes with several advantages:

No massive upfront costs. Unlike a traditional mortgage, there is no immediate massive downpayment on a rent-to-own home. The lack of massive upfront costs allows you to invest your savings in other opportunities.

No immediate debt. The monthly payment specified in the lease is what you pay. Taking on additional debt in the form of a mortgage is postponed until you formally decide to buy the home.

No obligation to buy. You are never locked into an obligation to buy. This helps minimize your financial risk as you take the time to decide on the purchase. 

No uncertainty - price lock and rent lock. In a rent-to-own arrangement, you can lock in the future purchase price of the home well in advance. This might come in handy in fast-growing hyper-competitive markets like the San Francisco Bay Area. Similarly, you also have the possibility to lock in rent with a multi-year lease.

No compromises. Many people rent and stay in apartments before they move into a home they own. But with rent to own, you have the option to move into and live in a home that you love and may eventually own. This reduces the cost and general inconvenience of moving frequently and you get to live in the home that satisfies all your requirements.

Try the home before you buy. One of the biggest advantages of rent to own is the opportunity to “test drive” your home. This try-before-you-buy approach gives people much needed time to ensure it is something they are able to take on before committing to it long-term. You get to learn about the house and whether it works for your family before committing to buy.

Cons of rent-to-own homes

Like the name would imply, you start by renting or leasing the home you want to eventually own. You don’t actually own your home until you have exercised your option to purchase it.

The future purchase price of the home is fixed upfront in most rent-to-own agreements. We see this as an advantage as it makes financial goals for eventually owning the home clear. However, the onus is on you to do the research to decide if the home is worth the agreed-upon purchase price. There is a possibility you may not qualify for a mortgage at the end of the lease term if you haven’t been meeting your financial goals (in terms of credit building or savings). 

Macro-economic factors may also have an effect on the outcome as the interest rate could be higher on the home loans by the time your lease term is up. If the prices fall, you may decide to walk away from the option and not buy the house at anything higher than what you deem is the best value. 

Finding homes for rent to own can be hard in your market. Typically, homes for sale are not available to rent and the ones for rent and not available for sale. That’s where we come in. With ZeroDown, you can pretty much choose any house on the market and try rent to own. 

Everyone’s situation is different. It is important that you weigh all the options before you choose what is best for your circumstances. If you are an aspiring homeowner and are wondering if rent to own is an option for you, visit us to learn more. Don’t forget to check out our new home search, where you can find your dream home and learn how it can be yours through ZeroDown’s rent-to-own program.

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