How Do Rent-to-Own Homes Work?

Steve Nicastro
Amy Beardsley

By 

Steve Nicastro

 & 

Amy Beardsley

January 25th, 2023
Updated January 25th, 2023

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✍️ We strive to provide objective recommendations and advice. This guide is intended to provide a comprehensive overview for your research, but for the most accurate and tailored advice, we recommend consulting with a local realtor, attorney, or financial adviser. Learn more about how we created this guide.

Rent-to-own programs (also called lease-to-own) let you pay rent to live in a home for a set period of time. At the end of your lease period, you can buy the house from your landlord at an agreed-upon price.

If you're struggling with mortgage approval due to poor credit, low income, or lack of down payment funds, rent-to-own programs claim to put you on the path to homeownership before you're ready to make a commitment.

Key takeaway

Make sure rent-to-own is a risk worth taking

Rent-to-own homes can be a viable option for aspiring homeowners who have less-than-perfect credit (580 or lower) or need time to save up for a down payment.

But not all rent-to-own agreements are legitimate or affordable — in fact, experts warn that the success rate of rent-to-own programs is often below 50%. If you can qualify for a mortgage now, need flexibility, or aren't sure if you want to live in the property long-term, these programs are probably not a good fit for you.

The agreements can also have many nuances, so it's crucial to fully understand the terms and conditions of a contract before signing. We recommend you seek advice from a realtor, real estate attorney, or financial adviser.

Looking for a rent-to-own home can be overwhelming. Clever will match you with an experienced local buyer's agent to help you find the best options in your area and make the process smooth and stress-free. Get started today!

How does rent-to-own work?

You can come to a rent-to-own agreement with companies or individual landlords. The specific terms will vary by provider, but the process typically goes like this:

  1. Find the house.
  2. Sign the contract.
  3. Rent the home and start saving for the purchase.
  4. Buy the house or move out.

A realtor can help you evaluate your options and determine which one has the best terms for you. Clever can match you with an experienced local buyer's agent for assistance.

Choosing an eligible home

You can search for listings with the help of a local realtor or rent-to-own company, such as Divvy Homes. Consider if you want to live in a specific house or a certain neighborhood or district. Rent-to-own companies typically only allow you to choose single-family homes and townhouses, and they may not allow condos, new construction, or homes in flood zones.

Rent-to-own contracts

There are two types of rent-to-own contracts: lease option and lease–purchase. The contract outlines your "option fee" (buy-in price), your monthly rent payments, and the home's future purchase price and down payment. You can work with your agent to negotiate these terms to your advantage.

Lease option agreement
Lease–purchase agreement
Choice to buy the home at the end of the lease or move out
Legal obligation to buy the property at the end of the lease
Option fee is 1–5% of the purchase price
May require higher deposit and monthly rent
Good for test-driving a neighborhood
Good for committing to a property

Before signing the contract, make sure you fully understand its terms and conditions, with the guidance of a real estate professional.

  • The length of the rental period (usually between one and five years): a longer rental period will cost you more in rent, but also give you more time to save up for your down payment.
  • The option fee, which can be a one-time payment or an annual cost that increases 3–5% per year.
  • How the home's purchase price was determined — for example, a rent-to-own company's valuation based on fair market value may cost you more than if the valuation is based on an official appraisal.
  • If rent increases each year (and by how much) impacts your ability to afford future rent payments and save up for your down payment.
  • Who's responsible for repairs and maintenance affects your budget and the future condition of the home.
  • If there's a termination fee for failing to buy the house at the end of your lease, and if so, what the fee amount is.

Move in and start saving

Generally speaking, your monthly rent will be higher than with a traditional rental because part of that payment (typically 10–25%) will go toward funding your future down payment. For example, a home with a monthly rent of $2,000 may actually cost you $2,200 to $2,500 to account for built-in savings.

During your rental period, you can take steps to build your credit score, improve your finances, and get a feel for the property you're in.

» SEE: How you can save for a down payment with a traditional rental

Pro tip
Be mindful that your cost to buy the home may increase annually as outlined in your contract. It's best to enter into a contract in a market where the value of the home is increasing faster than the option.

Exit the agreement: Buy the house or move out

If you decide to buy the house at the end of your lease, you must get mortgage preapproval and then complete the purchase with the help of your realtor or the rent-to-own company.

If you choose NOT to buy the home or you still don't qualify for a mortgage, you'll have to move out. You may owe a termination fee (up to 3% of the house price) and may lose some or all of your down payment savings.

Who do rent-to-own homes work best for?

"Rent-to-own can offer a powerful alternative for achieving some of the stability of homeownership before people are financially ready to buy, or know where they want to live," says Michelle Boyd, a housing policy expert and chief strategy officer at Terner Housing Innovation Labs.

👍 The ideal candidates for rent-to-own are people who…

  • Have a plan to improve credit scores and finances — if your current credit score disqualifies you from getting a mortgage but you expect it to get better in the future.
  • Need time to save up for a down payment — if you can afford monthly payments but don't have the thousands of dollars in down payment funds required.
  • Want to live in a specific house, neighborhood, or city — for example, if you want to move into a certain school district sooner rather than later.

Who should avoid it

👎 You might want to avoid rent-to-own programs if you don't think you'll qualify for financing in the future — or, alternatively, if you can qualify for a mortgage right now.

We think most aspiring homeowners are better off continuing to rent or taking out a traditional mortgage. Because rent-to-own homes require a big commitment and aren't nearly as flexible as traditional rentals, they're just not suitable for everyone.

» JUMP: Best rent-to-own alternatives

Since rent-to-own agreements often come with higher rent payments than traditional rentals. If you're not confident in your ability to qualify for a mortgage — maybe because of a low credit score or limited credit history — then you should avoid these programs. Boyd says, "It's best to explore other options such as saving for a down payment, improving your credit score, or looking into affordable housing programs."

Making the most of a rent-to-own home also means committing to a property, especially because some programs charge high termination fees if you don't end up buying the home. A job transfer, family illness, or other unpredictable circumstances can cause you to relocate.

"The actual success rate or conversion rate for some rent-to-own companies is quite low, often far below 50%," Boyd says. So if you anticipate moving within a few years or you're not prepared to forfeit all that money, sinking your funds into this kind of agreement isn't worth it.

Finally, if you already have the means to qualify for traditional financing (i.e., a mortgage), you can skip the “rent” and jump right into the “to own” part of your journey. It'll cost you much less in the long run.

Pro tip

When considering your mortgage eligibility, don't just rely on a conversation with a rent-to-own salesperson. Boyd recommends consulting with a qualified homeownership counseling agency or a lender. You can search for housing counselors at the Consumer Finance Protection Bureau.

Pros and cons of rent-to-own

Pros: A rent-to-own program can…
Get you into your desired home now. Lock in your preferred neighborhood without facing competition from other buyers in the future — even if you don't qualify for a mortgage right now.
Build up down payment savings. A portion of your rent typically applies toward a down payment savings fund, which can make it easier to afford a mortgage in the future.
Qualify you for a lower-cost mortgage. Extra time to improve your credit score or debt level can mean more favorable loan terms. If mortgage rates fall when you’re ready to buy, you could save a ton of money in interest.
Lock in your purchase price. If you're concerned about rising housing prices, rent-to-own could let you build equity toward today's price. But that could backfire if housing prices fall.
Lower your moving costs. A local move costs an average of $1,708. That's money and hassle you could save by not moving once the rental period's up.

Cons: Rent-to-own runs the risk of…
High up-front costs. You may have to pay a nonrefundable option fee (1–5% of the purchase price) to the rent-to-own company or seller.
Losing money. Most rent-to-own agreements aren't FDIC-insured, so if you can't purchase the home (because of a job change, out-of-state move, marriage, divorce, or any other reason that makes it impossible to buy), you may have to pay an expensive termination fee and forfeit your down payment savings.
Extra maintenance costs. You may be responsible for certain repairs during the rental period, which could end up costing you more than if you had just bought the home outright.
A limited selection of houses. Rent-to-own home listings make up a small percentage of the real estate market, so you not have many options.
Lower home value. You may still have to pay the agreed-upon purchase price to the seller — even if it's higher than the home's current fair value.

"Most rent-to-own companies do not have a formal policy in place for this scenario and it could potentially be detrimental to the future of their business model," Boyd says.
Complicated legal situations. Rent-to-own contracts can include technical details you may not understand.

"The contract should specifically state what portion of the rent goes towards the future purchase of the home, which appliances (if any) are included in the sale, and who is responsible for repairs and maintenance," says Bruce Mohr, an investment consultant.

Warning

Not all rent-to-own agreements are legitimate!

Rent-to-own programs aren't well regulated, so there's very little oversight when it comes to potentially predatory practices. As a result, there has been a significant rise in real estate and rental fraud: in 2021, 11,578 people fell victim to real estate or rental fraud (including rent-to-own scams), a 64% jump from the previous year.

The Federal Trade Commission issued a consumer warning about rent-to-own scams.

Rent-to-own home alternatives

Rent-to-own programs aren't a good fit for everyone. Here are some other options to consider when looking for a home.

You can look into loan programs like those backed by the Federal Housing Administration, Department of Agriculture, or Department of Veterans Affairs. These provide low down payment financing options for borrowers with less–than–perfect credit and may provide more favorable loan terms and lower interest rates.

These loan programs also have income restrictions, credit score minimums, and other specific requirements such as being a first-time home buyer or having a military background. Review these qualifications carefully before proceeding with an application.

Various state and local government programs may provide financial assistance to low-income families looking to buy a home. These programs may include grants for down payments, low-interest home loans, assistance with closing costs, and educational resources for first-time home buyers.

You can find programs in your area by checking with:

If you don't qualify for traditional financing, the seller could act as the lender and provide financing with more lenient requirements. This is also known as owner financing.

However, seller financing is often a complex, risky process. The loan terms may not be in your best interest, and there's no guarantee the seller will abide by your agreement. It's best to seek advice from a realtor or attorney before considering this option.

How do I find rent-to-own homes near me?

Hire a local realtor

A real estate agent can help you find and evaluate legitimate rent-to-own listings, Negotiate the terms of the contract, and offer guidance throughout the process — including helping you avoid scams.

If you're ready to start your rent-to-own journey, Clever can connect you with a top-rated local buyer's agent who can help you find the best listings. Don't miss out on this chance to secure your dream home. Contact us today to get started!

Work with a rent-to-own company

Several local and national real estate companies offer rent-to-own programs, in which they buy the house up front and allow you to rent it from them for a set period of time.

However, not all rent-to-own companies are reputable or legitimate, and some programs are deceptively expensive. Here are a few well-known companies:

  • Divvy Homes
  • Trio
  • Home Partners
  • Landis Technologies

» GET STARTED: Ready to compare rent-to-own companies and find the best fit for you? Let Clever assist you in the process!

Search online

If you want to do some solo research before talking to a realtor, you can also search real estate listing websites for rent-to-own properties on your own. Websites like ZeroDown, HomeFinder, Hidden Listings, and Rent to Own Labs often advertise rent-to-own home listings.

Bottom line

A rent-to-own agreement could make sense in specific circumstances where your financial options are limited. But we recommend exploring other paths first, like low-down payment mortgages and federal or state assistance programs, because rent-to-own agreements are complicated and often far more costly than advertised.

You can also keep renting and put the extra money you would have paid a purchase agreement into a high-yield savings account. This way, in 3–5 years, you can have more money saved up and a better chance at a mortgage.

It's best to consult with a local real estate agent, attorney, or financial adviser before moving forward.

FAQs

In a rent-to-own arrangement, you can buy a home after renting it for a few years. The contract usually requires you to pay more in rent than the standard fair market value, with the additional money usually going toward the down payment or the final purchase price of the property.

A lease option allows you to test out living in a home before committing to a purchase, while a lease purchase requires you to buy the property at the end of the lease period.

A rent-to-own agreement can help build your credit if the landlord or company reports your timely rent payments to credit bureaus. Not all rent-to-own providers participate in credit reporting, though, so check before entering into an agreement.

A few real estate sites list rent-to-own homes, but you may struggle to find listings in your area. A better option is to connect with a local real estate agent. Local realtors can connect you with sellers willing to rent-to-own their homes or help you compare rent-to-own companies.

Why trust us

Our team at Clever dedicated several weeks to learning the ins and outs of rent-to-own home programs to create this comprehensive guide. We studied contract agreements and sought the expertise of industry leaders, including the heads of rent-to-own companies.

Our experts

  • Marjorie Scholtz, the CEO of Verbhouse, a rent-to-own company that aims to provide affordable home financing options for low and middle-income workers in high-cost housing markets. Marjorie is also a licensed real estate professional and previously worked as a co-founder and CEO of Stangl Advisors, helping people navigate loan modifications, short sales, and foreclosure alternatives.
  • Michelle Boyd, a housing policy expert who works with Terner Center, a nonprofit organization dedicated to making housing more affordable and fair for consumers. Boyd also works with Terner Labs, a nonprofit affiliate that leverages technology to improve housing affordability and sustainability. She has been involved in supporting 17 early-stage companies over the past four years, with a focus on real estate development and making homeownership more accessible. Recently, Michelle worked with TechEquity to write "Rent-to-Own: The American Dream."
  • Bruce Mohr, a senior investment adviser and credit consultant with FairCredit.com. Mohr has 15 years of experience in the investment advisory business and works with clients on achieving creditworthiness and financial stability.

About the authors

Steve Nicastro is a real estate professional and personal finance writer based in South Carolina. He has first-hand experience with rent-to-own homes, as he has helped potential home buyers evaluate rent-to-own listings and programs.

He believes working with a seasoned buyer's agent can greatly improve your search for a rent-to-own home. These agents will use their access to the multiple listing service (MLS), industry connections, and local knowledge of rent-to-own companies to help you find the best housing options in your area. They can also assist with understanding and negotiating rent-to-own agreements and ensure that your interests are protected during the process.

Amy Beardsley is a content writer at Clever Real Estate. She has expertise in writing about real estate, insurance, and technology, and has worked with various reputable brands, including NerdWallet, Robinhood, LendingTree, Engel & Völkers, Opulence International Realty, Insurify, Legal & General, and NEXT Insurance. Her industry experience brings valuable insights to her writing and helps clients with their content strategy.

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