Rent-To-Own: Deal Or Scam?

Posted on

The idea of making house payments rather than rental payments is an appealing one. Rent-to-own situations may afford some with an option for becoming a homeowner, but only if they fully understand what they are agreeing to when the agreement is formed. These deals are not as regulated as a normal home purchase, and that makes it more difficult for buyers to protect themselves from problems. To get the scoop on rent-to-own homes, read on.

What's the Deal on Rent-to-own Homes?

It's easy to misunderstand what this term means. When you make monthly rental payments on one of these deals, all of the rent amount doesn't go towards the mortgage the way it does with a traditional loan. In fact, it would be more accurate to say that most rent-to-own situations are more like rent-to-down-payment deals. In most cases, the money paid to the homeowner each month contains a portion that is set aside by the owner. Once a given period of time has elapsed, the renter then enters an agreement to use those funds as part or all of a down-payment for the home. The renters must still secure a mortgage, however. Here are some tips for dealing with rent-to-own agreements.

Rent-to-own Tips

  1. Watch out for higher rental rates – The full amount of the payment you make each month can make the payments unaffordable for some. That is because only part of the payment is going towards the rent.
  2. Understand what happens if you want to get out of the deal – In some cases, you may not be refunded the extra money you've been paying if you fail to pay for the agreed upon period. Be sure you know the consequences of backing out of the deal as well as what happens if you fail to get your lending approved. For example, you may come to realize that the home is in an undesirable neighborhood while you are renting it.
  3. Understand the difference in rent-to-own and owner financing – There are some that combine these two helpful options, but many owners require you to get outside financing.
  4. Consider a less-restrictive alternative – If you can afford to pay a bit extra on rent that will go towards a down-payment, why not put aside some funds yourself? The only real benefit to a rent-to-own situation is the enforced savings. You must still negotiate for the purchase price and find a lender, which can be done without entering into an agreement that you will regret later.

To find out more about rent-to-own homes and what they entail, talk to a real estate agent.


Share