Rent-to-own homes seem like a great deal on the surface. You can move in and start making payments toward the purchase price without applying for a mortgage. But the truth is rent-to-own is not for everyone and comes with various pitfalls.
Here’s what to look for when evaluating rent-to-own homes, including potential pitfalls and how to avoid them. We break down five key risks to watch out for and provide you with the knowledge you need to make a smart decision.
Rent-to-own is complicated. Clever will match you with an experienced local buyer's agent to help you understand how rent-to-own works, and find the best housing options in your area. Get started today!
5 key rent-to-own pitfalls to consider
Rent-to-own homes come with confusing contract terms, which often vary by company or landlord. Above all, remember that you don’t own the property during the lease period. Here are some common risks to be aware of.
Lower up-front costs can make a rent-to-own seem like a good deal. But it can actually be more expensive in the long run for a few reasons:
Compare these costs against the costs of a traditional rental or mortgage before signing a contract.
They lack flexibility
Since you won't own the home until you buy it at the end of your lease period, you'll be subject to the same rigid restrictions as a traditional rental. Obviously, you can't anticipate everything: no one ever expects to get laid off, total their car, or suffer a debilitating injury or illness. But you won't be able to make any changes to the property, and breaking the lease would carry a hefty penalty.
For example, if you need more space because you're working from home, you have children, or a family member moves in, you may not be able to convert the garage into an extra room. Or if someone in your household suffers an injury, your contract may prevent you from adding an accessibility ramp, even temporarily.
In addition, if you decide not to purchase the home — maybe because you get a job in a different city and need to work on-site — then you could lose the money you've already put into the home and even have to pay a termination fee.
You can still get evicted
Just like any rental contract, your lease-option agreement will likely stipulate terms and penalties for late or missed payments. If you don't pay rent by a certain date, you may be subject to late fees. And if you miss payments entirely, your landlord or rent-to-own company can file an eviction order against you.
Finding yourself in an eviction situation doesn't just jeopardize your immediate housing status: the eviction filing alone can hurt your credit and make it harder to get approved for a rental lease or loan in the future — even if the eviction isn't ultimately carried out.
If you're concerned you may miss a payment, consider taking the following steps:
Check your contract so you understand the potential penalties (some companies actually offer support and flexible payment options if needed)
See if your state or municipality offers any protections or financial support for renters that might apply to your situation
Let your landlord or rental company know (better to be up-front — they're going to find out anyway)
Being proactive and getting out in front of the problem is always a smart thing to do. You may be able to file for unemployment, get a rent moratorium, or negotiate an adjusted payment schedule with your landlord (e.g., 2x/month).
Eviction processes laws vary by state or city, so connect with a local real estate professional for more specific advice.
Your home's value could fall
A rent-to-own agreement locks in the home's future purchase price, which poses a risk if the market crashes. The value of your home could fall below your agreed-upon purchase price, leaving you to pay more than what the home is worth.
However, your home's value could go up or down with a traditional mortgage, too, so you should be comfortable taking that risk either way.
You have a limited selection of homes
It can be hard to find a home that fits your needs and budget. There just aren't as many rent-to-own listings available as traditional homes and rentals, so your options are limited.
Many rent-to-own companies also don't allow condos, homes in or near flood zones, or homes on more than two acres of acres of land, which may reduce your options further.
How to avoid a bad rent-to-own deal
1. Review your finances
See if you can afford or qualify for a rent-to-own agreement now. Generally speaking, rent-to-own isn't a great fit if you're living paycheck-to-paycheck or don't have a stable, long-term employment situation.
Consider the higher rent payments, other costs, and whether you can secure financing by the end of the agreement. Speak with a financial adviser or lender for more specific advice to help you plan ahead.
2. Research and compare different options
Shopping around different rent-to-own options — whether companies like Divvy Homes, Trio, Landis or a homeowner listing — helps you understand your ranges of terms, costs, and potential risks so you can make an informed decision.
We recommend working with a realtor who has direct experience helping clients choose between rent-to-own housing options. A realtor can also determine a home's value by doing a comparative market analysis (CMA) to make sure you're getting a fair deal.
3. Thoroughly review your rent-to-own contract
A rent-to-own contract is a legal agreement, so you must carefully read and understand the terms and conditions before signing. This is where a realtor or attorney can provide a lot of value: they can help you spot hidden fees, unfavorable terms, or anything unclear.
It's also smart to get a home inspection on the property before entering into the agreement. You can identify likely complications with the property and negotiate repairs or maintenance before signing the contract.
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