Pros & Cons of Rent to Own Homes
Most prospective home buyers cannot afford to purchase homes outright with cash so they take on loans called mortgages. Securing a mortgage may require a good credit score and requires a significant commitment on the part of the borrower. Rent-to-own (also called rent-to-buy) is a home financing option where a buyer makes a small down payment on a home and rents the home for a certain period of time. Rent goes toward paying for the home.
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Not All Rent Goes Toward Buying the Home
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One of the primary reasons people buy homes is to build equity in the home through mortgage payments instead of paying rent to a landlord. Rent-to-own allows a portion of rent paid to go toward paying for the home, but not all of the rent goes toward paying it off. So, some of the rent does not build equity.
Losing Your Investment
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When you choose rent-to-own, you must make an initial down payment which may be about 5 percent of the home's value. After the rental period, which typically lasts anywhere from 2 years to 5 years, you must pay for the remaining value of the home. If you cannot find financing to pay for the home after the rental period or you fall behind on rental payments, you could lose your investment.
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Price Commitment
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Rent-to-own commits the buyer to pay a certain price for the home before the end of the rental period. During the rental period, the home price may fall due to poor market conditions. In this case, the seller may or may not allow buyers to renegotiate the purchase price. It is up to the buyer to decide whether it is more costly to continue with the purchase or simply walk away from the home.
Risks for Sellers
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Rent-to-own can also be a disadvantage to sellers. In a rent-to-own situation, the fate of the seller is largely dependent upon the buyer's choices. It can be beneficial to collect rent on a property and have someone take care of the home, but if the buyer decides to walk away from the home, it may result in less profit than if the seller had simply sold the home outright.
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