To qualify for a mortgage, borrowers need a good credit score and sufficient savings for a down payment. A rent-to-own agreement is an alternative path to homeownership that involves renting a home with either the option or the requirement to buy the property by the end of the lease.
You probably haven’t seen many rent-to-own homes advertised on typical real estate sites, so you may be wondering, how do I find rent-to-own homes? And how does the process work? Here’s a closer look at how rent-to-own homes work, strategies for finding them, and tips for negotiating a rent-to-own agreement.
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Understanding Rent-to-Own Homes
Rent-to-own homes, also known as lease-to-own homes, give renters a way to buy a home while living in it. If you’re on the fence about whether to buy or rent a home, this could potentially be a good option to try out a property and build up your finances before committing to homeownership.
Typically, the rent-to-own agreement outlines the duration of the lease, monthly rent, home sale price, and the option-to-buy fee. The latter effectively serves as security deposit for the renter’s right to buy the home at the end of the lease. This cost will likely be a minimum of 1% of the home price, and can often be applied toward the down payment later on.
With a rent-to-own arrangement, the monthly payment may include both rent that’s paid to the seller and a contribution toward a future down payment on the property, known as a rent credit.
There are two common types of agreements on rent-to-own homes: a lease-option agreement and a lease-purchase agreement.
A lease-option agreement grants some flexibility by allowing the renter to choose whether they ultimately buy the home when the lease expires. Both the home selling price and timeline for deciding to buy are included in the signed agreement, so it’s important to negotiate with the owner beforehand.
On the other hand, a lease-purchase agreement obligates the renter to buy the home at the end of the lease. Thus, it’s worth looking into mortgage preapproval beforehand to be prepared to obtain a home loan. Also make sure you can afford the purchase price outlined in the agreement. Completing a home inspection is good practice to identify any necessary repairs or expenses you would be on the hook for as the new owner.
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Benefits of Rent-to-Own
A rent-to-own agreement can offer benefits for both the seller and homebuyer.
It can be challenging to save for a house while renting. A rent-to-own agreement can be structured to allocate a portion of rent toward a down payment each month, putting renters in a better financial position to buy their home. Making regular rent payments can also build up the renter’s credit score — a key factor lenders look at to determine mortgage qualification. Renters could save on moving costs, too, in the lease-to-own homes scenario, as they’ll already be inhabiting the home by the time they purchase it.
For the seller, a rent-to-own arrangement provides rental income from tenants who are motivated to pay on time and maintain the property. These agreements can also bypass real estate listing fees if structured as for-sale-by-owner. Additionally, sellers can lock in the sale price in the agreement, providing peace of mind and a clear picture of their return on investment when the property is sold.
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Potential Risks and Considerations
There are also some possible drawbacks to account for when pursuing a rent-to-own agreement.
On the buyer side, the combined cost of rent and contributing toward a future down payment can be steep. If a renter decides not to buy, they could lose out on the money paid toward the option fee and down payment. And if personal finances change and they fail to qualify for a mortgage or miss rent payments, the agreement could be canceled and they’ll forfeit their opportunity to purchase the property.
Changes in home value could be a potential risk for buyers and sellers alike. If the property drops in value, buyers could have trouble qualifying for a mortgage or be required to put more toward a down payment. For sellers, agreeing on a sale price one or more years prior to selling the home could mean missing out on a higher return on investment if the property value increases beyond what is set in the agreement.
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Online Resources for Finding Rent-to-Own Homes
Looking to find legit rent-to-own homes but don’t know where to start? There are a variety of online resources to get started and narrow your search.
Dedicated Rent-to-Own Listing Sites
There are online portals and listing sites catering to prospective buyers looking for rent-to-own properties. Accessing these sites generally comes with a monthly cost, though there may be promotions for limited trials. Some popular sites include Hidden Listings, HomeFinder, and Rent-to-Own Labs, to name a few.
Real Estate Search Engines
Using a real estate search engine can help identify potential rent-to-own properties. Homes that are in foreclosure or listings that have been sitting on the market for a long time could be open to a rent-to-own agreement. Keep in mind that cold calling sellers about rent-to-own agreements can be a time-consuming approach.
Social Media and Online Forums
Aspiring homebuyers can broaden their search by looking for rent-to-own listings on online forums or specialty groups and pages on social media. These platforms enable buyers to take the initiative in making their own post that outlines the type of property and agreement they’re interested in.
When engaging on these channels outside your known network, practice extra due diligence in reviewing leads and opportunities to avoid rent-to-own scams.
Working with Real Estate Agents
Real estate agents may know how to find rent to own homes in your target area. Listing agents may have clients or contacts selling rent-to-own homes.
If you have a specific property in mind, a real estate agent could help negotiate the rent-to-own contract with the seller, although you’ll still want to consult a real estate lawyer to review the final agreement before you sign. Keep in mind that this may include commission versus pursuing a for-sale-by-owner situation.
Alternative Strategies for Finding Rent-to-Own Opportunities
There are other options that could help unearth rent-to-own homes: Spreading the word in your own personal network is a good place to start. And if you’re in an existing rental agreement or in the market for a new place to rent, asking about rent-to-own ahead of signing a lease could open up an opportunity with a landlord who may be looking to sell in the near-term.
There are real estate brokerages and companies that offer rent-to-own programs, too.
The Takeaway
The upfront cost of a down payment and credit requirements can be barriers to financing a home purchase. Rent-to-own homes offer another avenue for aspiring buyers to make homeownership a reality. There are multiple strategies buyers can implement to find a rent-to-own arrangement, including checking out online portals, contacting sellers directly, and working with a real estate agent or brokerage. When you’re ready to move forward with a rent-to-own arrangement or any home purchase, make sure you understand your home loan options.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
Are there any risks involved with rent-to-own homes?
One potential risk with rent-to-own homes is paying an option-to-buy fee that may be non-refundable if you opt not to buy the property. If the property decreases in value between signing the agreement and applying for financing, the buyer may have trouble qualifying or have to put more money toward a down payment.
What are the requirements to qualify for a rent-to-own home?
The requirements to qualify for a rent-to-own home are negotiated with the seller, but may include an upfront option-to-buy fee, credit check, and demonstrating sufficient funds to cover rent.
What happens if you can’t buy the home after renting?
If you can’t buy the home after renting, you likely won’t be able to recoup any money you’ve already paid the seller, including the option-to-buy fee and rent credit.
Photo credit: iStock/Drazen Zigic
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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