Rent-to-own can be a legitimate path to homeownership. But it also comes with serious risks most buyers don't see coming. High costs, inflexible contracts, and weak legal protections can turn what looks like a stepping stone into a financial trap.
The biggest issue is that rent-to-own agreements aren't well-regulated. If you default on payments, you can be evicted with no way to recover what you've paid in: No sale, no foreclosure, no recourse. Some companies don't fully disclose a home's condition, and most contracts don't allow independent inspections.[1]
A 2024 federal court ruling made things worse. Courts determined that real estate RTO agreements fall outside the federal definition of "credit," which limits the CFPB's enforcement authority.[2] In plain terms: don't count on federal consumer protection laws to bail you out if a deal goes sideways.
Another challenge is the binding nature of these contracts, which may commit you to buy the home when the lease ends, regardless of your circumstances.
Given these complexities, it's crucial to understand fully what you're entering into. Professional advice from an experienced realtor or real estate attorney can be invaluable.
» GET STARTED: Connect with a local buyer's agent who will guide you through the rent-to-own process and help you find the best housing options.
5 key rent-to-own pitfalls to consider
Rent-to-own homes often have confusing contract terms that vary by company or landlord. Above all, remember that you don’t own the property during the lease period. The seller retains ownership until the end of the term, at which point you can purchase the house, continue renting, or leave. If you decide not to purchase the home, you may be required to pay a "relisting fee."[3]
Be aware of these common risks when considering a rent-to-own arrangement.
1. They're expensive
Lower up-front costs can make a rent-to-own seem like a good deal. But it can be more expensive in the long run for a few reasons:
The financial implications of transitioning from renting to owning vary significantly across lease-to-purchase agreements. While some agreements offer a cost-free option to purchase, others may involve various fees, some of which may not be refundable if you decide not to buy the home.[1]
It's crucial to carefully compare these costs with those of traditional rentals or mortgages before entering a rent-to-own contract.
2. They lack flexibility
Rent-to-own homes offer limited flexibility. As you don’t own the property during the lease term, you face the same restrictions as in a traditional rental, which can be challenging if unexpected life changes occur.
For example, you can't make modifications to the property. Suppose you need more space because you work from home, have a child, or accommodate an injured family member. In that case, you can't alter the property to fit your needs, such as converting a garage into an extra room or installing an accessibility ramp.
Also, if your circumstances change—perhaps due to a job relocation or a death in the family—you might decide not to purchase the home. This decision could mean forfeiting any money already invested in the property and potentially facing a hefty termination fee (1-3% of the home's value).
3. You can still get evicted
Like any rental agreement, a lease-option contract includes specific terms about payment deadlines and penalties. Late or missed payments might incur late fees, and consistent failure to pay can lead to eviction proceedings. An eviction doesn't just disrupt your living situation; even an eviction filing can damage your credit score and impact your ability to secure future housing or loans.
Concerned about missing a payment? Next steps
Here's what to do if you're currently renting or in a rent-to-own contract and at risk of eviction.
- Review your contract. Understand the penalties for late or missed payments. Some companies might offer flexible payment options or support.
- Explore legal protections. Check if local or state protections for renters could apply to your situation.
- Communicate proactively. Inform your landlord or rent-to-own company about your financial situation sooner rather than later. They may work with you to adjust your payment schedule by allowing bi-monthly payments.
- Seek professional advice. Eviction laws vary significantly by location. Consider consulting with a local real estate expert to better understand your options.
4. Your home's value could fall
Committing to a rent-to-own agreement locks in the home's purchase price at the start of the lease, potentially leaving you in a precarious financial situation if the housing market declines. Here are the risks:
- Negative equity. If the home's market value falls below your agreed purchase price, you end up in negative equity, meaning the house is worth less than you owe. This situation can complicate efforts to refinance or sell the home without financial loss.
- Financial stress. Committing to a purchase price above the market value can overstretch your finances, particularly if unexpected life events force you to sell the home in the future. You may not recover your initial investment and could even need more cash to cover the loss on sale.
Divvy Homes is a real-world example. One of the largest and most well-funded institutional RTO companies, Divvy locked customers into purchase prices based on 2021–2022 home values. When interest rates surged, those locked-in prices became unaffordable. The company paused new home acquisitions in August 2023 and was later acquired by Brookfield Properties.[4]
If you back out, these risks are more pronounced in rent-to-own arrangements due to the possible loss of non-refundable payments. Unlike rent-to-own buyers, traditional homeowners maintain any equity built into the property, which can help reduce losses in a market downturn.
5. You have a limited selection of homes
Rent-to-own properties only make up about 2% of all available housing options.[5]
Finding a home that fits your needs and budget can be difficult. There aren't as many rent-to-own listings as traditional homes and rentals, so your options are limited.
Also, consider that many rent-to-own companies don't allow condos, homes in or near flood zones, or homes on more than two acres of land, which may further limit your options.
» LEARN: How to Find Rent-to-Own Homes Near Me
How to avoid a bad rent-to-own deal
1. Review your finances
Before considering a rent-to-own option, evaluate if it's an option financially. If you're frequently making ends meet or lack stable, long-term employment, a rent-to-own agreement might not be suitable.
Review the elevated rent payments, additional costs, and your ability to secure financing by the lease's end. Consulting a financial adviser or lender can provide tailored advice to help you prepare.
2. Research and compare different options
Research various rent-to-own companies and listings to understand the available terms, costs, and potential risks so you can make an informed decision.
Engaging with a realtor experienced in rent-to-own scenarios can be particularly beneficial. They can perform a comparative market analysis to ensure you enter a fair deal.
3. Carefully review the contract
A rent-to-own contract is legally binding, so it's crucial to thoroughly understand the terms before committing. Enlist the help of a realtor or attorney to identify any hidden fees or unfavorable conditions.
Additionally, arranging for a home inspection before signing the contract can reveal any significant issues, allowing you to request repairs or adjustments beforehand.
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