A rent-to-own home might sound like a viable path to home ownership, but there are serious risks to consider. Read on to learn how rent-to-own deals work, what can go wrong, and the steps you can take to protect yourself.
What does rent-to-own mean?
What does rent-to-own mean?
Rent-to-own homebuying combines a lease with a purchase option. A contract specifies the terms of the deal, including the monthly rent, the timeline for the purchase option, the purchase price, and who's responsible for property maintenance costs during the lease period.
In some cases, the rent includes an amount that's allocated towards a down payment. Ideally, the amount accumulates during the lease period to fund 3.5% or more of the purchase price, the minimum down payment required for an FHA home loan.
Lease
When does renting to own make sense?
When does renting to own make sense?
If you're a prospective homebuyer who doesn't meet the qualifications for a traditional mortgage, renting to own could be your next-best alternative. The strategy is particularly appropriate if:
- You have good credit and sufficient income but no down payment.
- You love the home and see yourself living there for years. If the home isn't compelling, you're better off renting something else and saving independently for your down payment.
Renting to own isn't a good fit for well-qualified homebuyers for two reasons. One, there is a smaller universe of homes available via rent-to-own contracts vs. homes you can buy with a traditional mortgage. Two, renting to own is riskier. You may not be able to secure financing when it's time to buy. Or the home could turn out to be a maintenance nightmare.
If the contract expires and you move out, you will probably forfeit any accumulated down payment.
Due diligence before signing a rent-to-own contract
Due diligence before signing a rent-to-own contract
Because there are risks in play, you're smart to take extra precautions before signing a rent-to-own agreement. Consider the seven defensive moves outlined below.
- Ask the right questions. There is no standard rent-to-own arrangement, which means the terms can vary widely from one deal to the next. That puts the onus on you to read the contract carefully and ask the right questions, including:
- How long is the lease term? Is it extendable?
- When does the option to purchase begin and end?
- Are there any one-time fees for the tenant, upfront or at the time of purchase?
- Does any portion of the rent accumulate toward a down payment?
- What happens to any accumulated down payment or fees paid if the contract expires without an ownership change?
- Who is responsible for property maintenance and repair costs during the lease term?
- Shop around. It's easier to evaluate the terms when you know the purchase and rent costs for homes in the area. Do the research. You need that context to understand whether the landlord is offering you a good deal or a bad one.
- Negotiate. If the terms seem unfair or extreme, try negotiating. You don't have to accept what the landlord offers if any part of it makes you uncomfortable.
- Get prequalified for a mortgage. Getting prequalified for a mortgage before you sign the contract removes some uncertainty from the process. This step is added confirmation that you can afford to buy the home at the agreed-upon price.
- Know the home and the neighborhood. Two or three years may pass between the day you start renting and the time you're ready to purchase the home. Do your best to assess how suitable the property will be for you and your family. If there's a chance you'll outgrow the home or the neighborhood quickly, look for something else.
- Ask a lawyer. Have a lawyer review the contract. That should keep fine-print surprises to a minimum.
- Get the home inspected. If the contract makes you responsible for repairs, hire an independent property inspector to give the home a once-over.
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Case study: Predatory rent-to-own practices
Case study: Predatory rent-to-own practices
In the late-2010s, rent-to-own company Vision Property Management found itself in serious legal trouble in multiple states, including Wisconsin, New York, and Pennsylvania. New York regulators also went after Atalaya Capital Management, a hedge fund that had provided financing to the property manager.
State authorities alleged the company had a practice of misleading low-income, would-be homebuyers with predatory sales practices. In an interview with a local Wisconsin TV station, a former Vision employee admitted to placing tenants in homes they could not afford and asking them to sign agreements they did not understand.
Vision's property inventory included thousands of foreclosed homes purchased cheaply from Fannie Mae. Many had serious maintenance issues, including leaking roofs, mold, bad plumbing, and bug infestations, according to the Pennsylvania attorney general's office.
Vision pushed those maintenance issues to its largely low-income tenants, who were contractually obligated to pay for home repairs. The company's Better Business Bureau page details complaints from customers who say they spent tens of thousands on maintenance and were unable to secure deeds to those homes.
Today, Vision Property Management no longer exists independently. In 2020, former telecommunications company FTE Networks announced its subsidiary US Home Rentals had purchased Vision. In a disturbing postscript, FTE would later be delisted from the New York Stock Exchange, and its top executives would be charged with securities fraud and grand larceny. On its website, FTE now describes itself as a diversified real estate investor.
The Vision Property Management saga demonstrates the seedy side of rent-to-own transactions. Protect yourself from that type of landlord with the guidance of a lawyer and property inspector.
