The Disadvantages of Lease-to-Own

Buyers who choose a lease-to-own option should carefully weigh the pros and cons.

Home buyers may choose a lease-to-own option if they have poor credit, a small down payment or a short work history. With lease-to-own contracts, a potential buyer can rent a home and apply a percentage of the rent toward the purchase price or down payment on the home. In some cases, rental payments do not apply toward the purchase price, but the seller will lock in a negotiated price while the buyer secures financing and a down payment. The rent-to-own option has advantages in some situations, but the downsides may make it a less-attractive choice for other home buyers.

Landlord-Tenant Law

Tenants renting a property with an option to buy are not protected by the Uniform Residential

Landlord Tenant Act. Landlord-tenant laws shield tenants from unlawful evictions and from property owners who fail to adhere to the terms of the lease, among other things.

Mortgage Restrictions

The property owner's current mortgage may not allow a rent-to-own option. The University of Tennessee at Knoxville says a lender may demand the entire amount of the loan from a property owner who enters a least-to-own agreement when it is not allowed. If the property owner fails to pay the remaining amount of the loan, the renter in a lease-to own arrangement may lose the right to the property.

Potential Forfeiture of Payments

A seller can cancel a lease-to-own arrangement for non-payment, lack of insurance or other violations of the lease. In this situation, the buyer would lose all payments made to the seller up until the time the seller cancels the lease agreement.

No Interest Deduction

A lease-to-own buyer does not have the advantage of the interest deduction available to home buyers with a traditional mortgage. This can result in a significant loss when compared with a mortgage from a traditional lender.

Higher Housing Cost

According to Rent to Own the Right Way, the sales prices of homes with a rent-to-own option tend to be higher than in traditional sales. Home buyers still have the option to shop around and negotiate for a better price. The buyer may save on the down payment with a lease-to-own option, however..

References

• Rent to Own the Right Way: Pros and Cons of Rent to Own Homes
• University of Tennessee at Knoxville: The Risks of Leasing a Home With an Option to Purchase