What is Rent-To-Own?

Rent-to-own (also called lease-to-own or lease purchase) has become more popular in recent years. With the bursting of the real estate bubble, many home owners are now unable to sell their homes and are looking at renting their homes as an option. Many would be buyers are now finding credit harder to come by, or have had their credit damaged by a foreclosure or short sale and are looking at rent-to-own as a way to build up equity in a home while repairing their credit.

So what is rent-to-own? Rent-to-own is a lease combined with an option to buy a property within a specific time period. Generally the time period for rent-to-own is 1 to 3 years. Usually the renter/buyer will pay a fee at the time of the contract (similar to a down-payment). This fee will be credited to the purchase price. The tenant will then pay a monthly rent and an additional premium that will go towards the purchase price. If the buyer cannot purchase the home by the end of the specified period, all premiums and fees will usually be kept by the seller.

A rent-to-own agreement is a financial contract, just like a regular purchase agreement. The terms on the contract can be negotiated and changed before signing with both parties approval. Buyers/renters must be careful to understand the terms of the contract and make sure the deal is not structured against them. Obtaining a real estate lawyer is usually a good idea, especially if you do not have much experience in real estate transactions.

As a buyer make sure the contract terms are going to work with your situation. If you have just done a short-sale, your credit will probably not allow a traditional mortgage for five years. It would not make sense to do a rent-to-own purchase with a 3 year term.

As a seller make sure you can live with the terms. Many people who are selling a home need to get their present home sold before buying their next one. Make sure you can afford to keep the equity in the home you are selling tied up for the term of the rent-to-own agreement.