The traditional rent-to-own agreement, also called a lease purchase option, creates a path from tenancy to home ownership for occupants of rental housing. While a rent-to-own arrangement can benefit both parties, some of the unique features of the structure make it potentially the least buyer-friendly creative financing option for a home purchase.
Lease Option Costs
When you move into a property on a rent-to-own arrangement, it usually costs more than renting a property outright. In some cases, you will have to pay a larger deposit. In addition, you will pay more every month. The extra money you give your landlord gets allocated to the eventual purchase price of the home.
Lease Option Rules
When you set up a rent-to-own transaction, the rules get set by you and the seller. Some of the clauses that get included in the agreement can be detrimental to your interests. For example, some lease-to-own agreements make the tenant responsible for maintaining the property even before they close on the purchase, letting the landlord escape one of his traditional obligations. Others allow the landlord to cancel the lease option if you breach your obligations under the lease. If this happens, your landlord will pocket all of the extra payments that you made.
Lease Options and Financing
When you do a traditional rent-to-own transaction, you’ll eventually need to buy the property, usually by getting a mortgage. If you can't qualify for a mortgage, you won’t be able to buy the property. You will also lose all of your option payments. Bear in mind that your lender may look at your option funds as a price reduction instead of down payment money. For example, if your purchase option reduces the price on a $200,000 house to $190,000, your lender may not look at the $10,000 reduction as a down payment. They will, instead, lower your loan amount.
Lease Options for Sellers
When you’re the seller, a rent-to-own can be a win-win situation. If the tenant ends up buying the property, you get it sold without having to pay broker fees and you collected rent for a good period of time while you waited for the closing. If the tenant defaults, you were able to pocket all of the extra rent that she paid you, and you can start again with someone else. Given that only about 10 percent of tenants actually close on traditional rent-to-own properties, this is a very likely scenario.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.