The Pros and Cons of a ‘Rent-to-Own’ Agreement
Rent-to-own agreements allow you to rent a house for a designated period of time and buy it at the end of the contract. It can work in one of two ways: a lease agreement with an option to purchase or a lease agreement and a purchase agreement. The key difference between the two options is the first option allows the renter to choose whether they want to buy the house at the end of the lease. The second option might legally require them to buy it.
Here are some pros and cons of a rent-to-own agreement, from the original homeowner’s perspective.
Pros of rent-to-own agreements:
- It’s another strategy to help you sell a home that’s been on the market for some time. Rent-to-own agreements are not very common place. In fact, there are very specific circumstances in which a rent-to-own agreement may come into play. Let’s say you’re a homeowner and your property has been listed on the market for some time. Rent-to-own agreements are another avenue to help you sell a house that’s not moving on the market. If you have a tenant that’s lived in the house for some time, always pays on time (e.g. financially stable) and appears to enjoy living there, you might broach the subject of ownership with them.
- You’ll get to keep the money the tenant paid over and above the rent either way. The rental payments for rent-to-own agreements are typically made up of the monthly rent plus additional funds that go toward a future down payment. If the tenant has a lease agreement with option to buy and they decide to walk away, you — as the homeowner — usually get to keep the money they paid over and above the rent. The contract should also specify those terms so that both parties are aware coming into the agreement.
Cons of rent-to-own agreements:
- Your tenant could decide not to buy at the end of the lease. If your tenant has a lease agreement with an option to buy, there is no legal obligation for them to purchase it. That means, you could have spent several months anticipating the sale of your property, only to find out that you’re now back at square one. You do, of course, get to keep the money they paid over and above the rent. That won’t likely compare to the amount you would have received if you sold the home.
- You’ll have to negotiate the price of the home yourself. In a rent-to-own agreement, the sale price of the home will be set from the get go. If you were selling your home on the market with a real estate agent, they would typically help you set the price of your home and negotiate with buyers on your behalf. In the case of rent-to-own agreements, real estate agents rarely want to get involved. If you think about it, it makes sense. They would have to wait months — even years — for the lease agreement to end and the home sale to close to get paid. As a result, you’ll probably be on your own to determine a price and you could very well sell your home for less than it’s worth.
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