Federal Financial Insights
July 20th •
For the sellers, a rent-to-own agreement can mean the difference between turning a profit and letting a house sit vacant. For buyers, the same contract can finally allow you to buy the home of your dreams instead of constantly worrying about saving money as a renter.
You’d be wise to consider renting-to-own (also called a lease-option) as a viable way to take the headache out of stagnant markets, unreliable tenants/landlords, or less-than-stellar credit.
One of the reasons sellers consider rent-to-own contracts is that their house was already on the market but just isn’t selling fast enough. Offering a lease-option on your home is a great way to get prospective buyers in fast—better than letting an empty house sit around costing you money.
Even if you’d rather sell the house and be done with it, rent-to-own contracts often attract more serious tenants than you might find by listing your property for rent.
That’s because these renters are already so interested that they want to buy the house, meaning they’ll be more likely to treat it with respect during their rental period.
And if your house is competing with several similar properties in the area, renting-to-own gives you the edge in that you can under-price your home in comparison to sellers looking for an outright sale.
But that’s not to say you’ll take a loss on the house. In fact, rent-to-own agreements will bring in even more money for you, because you get rent and a one-time option fee from your tenant…meaning thousands more in earnings for you if they decide not to exercise that option down the line.
This strategy works to your advantage even if you list your home during a down market. Normally you’d have to settle on less than your asking price—but with a lease-option agreement, at least you can recoup some of those losses with rental revenue.
The main benefit of entering a rent-to-own agreement as the buyer/renter is that it lets you avoid most of the up-front costs of buying a new home.
For starters, a lease-option doesn’t require a huge down payment. Instead, you’ll be able to save up for one using monthly credits tacked on to your rental period, plus anything else you manage to save up during that time.
Yes, you are required to pay an option fee, which gives you the ability to purchase the home after your rental period is over. But when you do decide to buy, that fee goes towards your closing cost.
Second, prospective renters with very negative marks on their credit scores—like bankruptcy or foreclosures—can play the waiting game while those marks eventually stop affecting their reports.
Through a combination of diligent saving, improving your credit score, and accruing credits every time you make a rent payment, rent-to-own contracts reward your patience by letting you buy houses that would normally be unobtainable.
In fact, by the time your lease period is over, you won’t likely need much more money to make the down payment.
As if that wasn’t good enough, the value of your home can actually increase before you purchase it. Through appreciation and sweat equity (adding value through improvements while under the terms of your lease) you come out on top because the home’s purchase price is locked in the day you sign your contract.
Often with rent-to-own homes, your move in time can be in as little as one week (compared to the sometimes lengthy waiting periods for traditional buyers).
And in general, renting-to-own is a much better investment of both time and money than simply renting a house. It’s an investment that goes towards fulfilling your dreams instead of filling a landlord’s pockets.