Thursday, February 14, 2019 / by Connie Tracy
Recently, I have been asked by quite a few clients, who have been tossing around the idea of renting-to-own a home while they work on getting their credit score up to snuff or just saving enough money for a down payment, what the benefits are for going this direction.
Even if it’s your dream house, do the pros really outweigh the cons? Let’s dig deeper.
Pros for Buyers
Build your down payment over time. Instead of having to hand over a large down payment when you move in, you build equity over a specific period of time by paying higher rent.
You can avoid buyer competition. At the end of the rent-to-own agreement, you won’t be up against other buyers for the property.
You don’t have to qualify for a loan right away. You may be drawn to a rent-to-own program because you can’t afford to buy a home, yet. Maybe you’re still paying off debt or you don’t have a down payment saved, or you are building your credit. Moving into a house without qualifying for a loan may seem like the answer, but here’s the skinny: The chances of your rent-to-own agreement falling through go WAY up if you aren't financially ready.
Cons for Buyers
Your rent will be MORE expensive. Since part of your rent is going toward equity in the home every month, your rent prices will be higher because of that. Why not just rent a place for less money and keep the money you’re setting aside for a down payment in your own bank account instead of your landlord’s?
You’ll pay non-refundable option money. You will have to pay a percentage of the home’s price to have the option to purchase the home down the road. These are payments you probably won’t get back if the deal doesn’t work out.
You may have to pay for repairs and maintenance. In rent-to-own agreements, odds are, as the potential buyer, you will be responsible for all repairs and maintenance on the home. Those unexpected emergencies can put a serious hole in your bank account...for a house that doesn't even belong to you!
Home values could go down. If you have a rent-to-own contract for a couple years, you have no way of knowing what the real estate market or local economy could do during that time. IYep, your home value could go up, but it could also drop. The purchase price you lock in at the start of the contract is usually inflated to account for rising home values. What does that mean to you? That means, you could end up paying more than the property is actually worth.
You could decide you don’t want to purchase the house. So many unexpected life events can come up while you are renting -to-own. For example, let’s say you get a new job that requires you to relocate to a new city. Maybe you still can’t qualify for a mortgage at the end of the contract agreement. Perhaps you just decide this house isn’t for you. If you’re in a lease option agreement, you can walk away from the contract. However, you can say goodbye to all the cash you forked over in higher rent and option money....That’s thousands of dollars you won’t get back.
The contract favors the seller. Something as small as a late rent check or not paying for a repair in a "timely manner" could release the landlord from any obligation to honor the contract. That means you could be out of a house.
Events out of your control could cause you to lose your equity. If the landlord’s financial situation changes and the house goes into foreclosure, that house goes to the bank...not to you. Additionally, if the seller changes their mind after they’ve signed a rent-to-own contract, it would take expensive legal action to enforce the contract. That’s a cost you may not be able (or willing) to pay.
When you have dreams of buying the perfect home for you and your family, it can be easy to rush the process. Just remember: Although a rent-to-own agreement is a legally binding document, it has way too many loopholes to be a guarantee. Keep your money in your own bank account and save up for the home of your dreams!
Alternatives to the Rent-to-Own Process
The cons outweigh the pros, when it comes to rent-to-owning a home. If you want to make a smart decision for your future, it’s quite simple...Avoid a rent-to-own situation, even if it means you have to wait to move.
It’s worth it to buy a house the smart way. If you need time to clean up your finances, that’s a great plan. There’s no shame in renting while you pay down debt, save a reserve fund, and perhaps beef up your credit score. In fact, that’s the best thing you can do! After your finances are in order, you can start putting money aside for a hefty down payment. Don’t buy a house—or sign an agreement to buy a house—when you’re broke! The last thing you want is to be house poor.
Cleaning up your financial mess and saving a down payment isn’t easy. It takes hard work and sacrifice. But it’s worth it! When you move into your new home, you’ll know that it is the home you and your family will live in and build memories that will last for years!
Finally, Find a Real Estate Expert
The pressure to buy a house is real. We get it! But before you jump into a rent-to-own situation that wrecks your future, talk to a real estate agent. They can help you understand your options and make the best decision for your future.
Buying a house the traditional way may take more time, but it’s worth it. When you’re ready to buy, a real estate agent can help you find a house in your budget you will love.
Check out my website at connie.viewhomesinspokane.com for more helpful articles for buyers and sellers! The more you know, the more prepared you will be in this competitive market.
Ready to sell your home? Want to purchase the home of your dreams? Have more questions?
Call or shoot me a text and I will be happy to share more with you about selling or buying a home!
Your Friendly Real Estate Expert... Cheers!
Haven Real Estate Group