Rent-to-own (RTO) is an agreement where a tenant leases a property for a pre-negotiated period of time with the goal of purchasing the property at the end of the lease at a pre-negotiated price.
In theory, RTO is a good way for people with bad credit or without enough savings to get their foot in the door of homeownership. In practice, it provides limited benefits while presenting additional risks other strategies do not.
If you’re ready to buy and need an agent who can find the perfect fit, let Clever match you with the right real estate agent for your situation.
What is rent-to-own?
Rent-to-own (RTO) describes any arrangement where a buyer rents from a seller for a predetermined period of time before purchasing the home. There is no standard agreement so the details vary widely but most RTO agreements share these characteristics:
Higher than market-rate rent payments, a portion of which goes toward your down payment
An opportunity to purchase the property at the end of the lease
Among RTO contracts, there are two broad categories: lease-option and lease-purchase agreements.
In this agreement, the tenant has the choice to purchase the home for a predetermined price at the end of the lease. If they choose not to purchase the home, their only loss would be the extra rent they paid each month.
In lease-purchase rent-to-own agreements, the tenant agrees in advance to purchase the home at the end of the lease. This is a riskier arrangement because in the event that you can’t or don’t want to purchase the home, you can potentially be sued.
This is especially tricky because you’re promising to make a substantial purchase a few years down the line. If, for whatever reason, you have to spend some savings on another emergency or you can’t get approved for a loan, your financial difficulties would be compounded.
Who is rent-to-own for?
Rent-to-own (RTO) doesn’t really make financial sense for anyone. These agreements can add undue financial strain and there are better ways to prepare for future homeownership. That said, there are two situations for which it is theoretically designed.
People who have bad credit
The idea is that if you do not have a high enough credit score to get approved for a large enough loan to purchase the house, you can rent-to-own (RTO) while you take some time to build your credit score.
In practice, this presents some problems.
Rent-to-own agreements often include higher-than-average rent costs, which may make building credit by paying bills on time every month more difficult.
Your credit score is determined by several factors but the most important one in your control is whether you pay your bills on time. In order for this behavior to raise your score, the entity you’re paying has to report your payment to a credit bureau. The Consumer Finance Protection Bureau has more information about how to improve your credit score.
You may think that paying rent would help build credit, but in most cases your landlord does not report on-time rent payments. You could theoretically arrange for your landlord to do this and it might include paying a service to facilitate. It may be possible to negotiate this into your agreement.
Additionally paying what may otherwise go into a savings account to your landlord every month means you will be less equipped to pay large irregular bills like medical bills should they come up.
People who have too few savings
People who want to buy a house but can’t afford a down payment may be drawn to RTO as it allows them to pay some or all of their down payment over time. This money is charged as a higher-than-market-rate rent and is typically held in an escrow account.
Again, in practice, there are serious disadvantages:
In some cases, even if the money is held in an escrow account, you risk losing it if you are either evicted or do not purchase the property at the end of the agreement. If you had simply saved this money yourself, there's no risk of this.
Living in a more expensive situation may negatively impact your ability to continue building savings. Even though you are building a down payment, you may be hampering your overall savings compared to living in a market or below-market (if you’re lucky) space.
These factors compound as well. Having too few savings because you are paying them to your landlord may impact your ability to pay other bills, which could hurt your credit score. Paying higher rent as opposed to saving might mean you have to pay less than the full amount on your credit card bill, costing you more in the long run due to interest.
Locking yourself into an RTO arrangement when it’s going to stretch you thin financially is a big risk.
How do you find rent-to-own properties?
Rent-to-own (RTO) properties are much more difficult to find than standard home purchases or rentals. If you are still interested despite its downsides, there are a few ways to go about finding one.
Companies that facilitate rent-to-own
The most reliable way to find properties is to go through one of the companies who specialize in rent-to-own arrangements. These companies vary in what they offer and how they construct their agreements.
Divvy is start-up was founded in 2016. According to The New York Times, most of their initial leases, which are three years long, have not ended. This means there is not very much information about the full rent-to-own life cycle. They allow customers to cash out their savings if they choose not to purchase, lowering the risk of the proposition.
Divvy is available in Atlanta, Cincinnati, Cleveland, Dallas, Denver, Fort Lauderdale, Houston, Jacksonville, Memphis, Miami, Minneapolis, Orlando, Phoenix, San Antonio, St. Louis, and Tampa.
Divvy has a 2.2/5 star customer rating with the Better Business Bureau, with many customers complaining of unreliable service and unpredictable cancellations, especially early on in the process.
Home Partners for America
Founded in 2012 and purchased by Blackstone in 2021, Home Partners of America is currently based in Illinois.
Home Partners of America allows themselves to raise your rent by 3.75% a year and to raise the final purchase price of the home 3.5-5% a year depending on the metropolitan area. These elements mean that if it will take you a few years to save enough or build your credit, you may pay a significant penalty.
According to reporting at the time Blackstone purchased them, Home Partners of America owns more than 17,000 homes. Its website claims the company has worked with people in 78 metropolitan areas.
Home Partners of America has a 2.5/5 star customer rating with the Better Business Bureau, and there have been 49 complaints filed against them. These mostly stem from poor communication practices and unreliability.
Hiring a real estate agent
Even though rent-to-own agreements differ significantly from standard purchases, real estate agents can still be a great resource. That said, some agents won’t be interested in facilitating rent-to-own deals because their commission is delayed — they'll typically only get paid if you buy the home at the end of the lease.
There are real estate firms that, on top of purchases, help renters find rentals. Finding a local agency which does both will raise the odds that they will be able to help find a rent-to-own property.
Once you find an agent who is open to helping you, make sure to ask about their experience. Rent-to-own agreements have lots of potential pitfalls and someone familiar with the process can help you avoid them.
There are agencies, like Coldwell Banker and Century21, that have partnerships with the aforementioned rent-to-own companies. This can be convenient but it’s important to be mindful of competing incentives. What is good for the company will not necessarily be good for you.
🚨 No matter what, hire a lawyer!
RTO agreements are nonstandard and there are a large number of potential pitfalls that can impact tenant-buyers negatively. A lawyer will make sure you understand exactly what you’re agreeing to, negotiate in your favor, and protect you legally.
The most important things to get clarity on are:
Alternatives to rent-to-own real estate
Renting while building credit and savings
You can stay on the path to homeownership without renting-to-own (RTO) if you do so deliberately. Simply continuing to live in a standard rental while saving and building your credit can be a better way to build savings and credit.
Because there are so many more rentals than there are rent-to-own properties, you’ll likely be able to find something comparable for a cheaper price, allowing you to save for a downpayment. You can also continue to build credit in the same ways that you would, with more financial flexibility if you need it.
Take advantage of first-time home buyers programs
Many states and municipalities have programs to make home buying more affordable for first-time buyers. These usually make it possible for people with less-than-stellar credit to get approved for a loan at a good rate with closing cost assistance and a smaller-than-typical down payment.
These benefits address the same areas that RTO arrangements address without many of the potential problem areas. You can learn more about these programs from the U.S. Department of Housing and Urban Development.
Purchasing a smaller home or a home in a different area
If affordability is the main concern, it could be worth choosing a smaller home or a comparable home in a different area. This is not an answer many people are excited to hear but choosing a home and a place to live is about balancing priorities.
If the size and features of the home is most important, perhaps an area further out from a city center would be a better fit for you. If, instead, location is your top priority, perhaps a smaller home or one that needs some work would be a great option.
Either way, you can save money when purchasing a home by using our friends at Clever!