5 Signs You've Found the Perfect Rent-to-Own Home Situation

Rent-to-own home deals give a tenant time to better prepare for getting a mortgage.

A rent-to-own home agreement (also referred to as "lease-to-own") gives a tenant the option to purchase a property after renting it for a set period of time.The typical rent-to-own period is five years, although it's negotiable. At the end of the lease period, the tenant has a right to take out a mortgage and purchase the home. Rent-to-own home deals come in all shapes and sizes, some with better terms than others. Here's how you know you've run into the perfect rent-to-own situation.

1. The owner is open to negotiation

One of the primary reasons a person may shop for a rent-to-own home is that they can't qualify for a traditional mortgage. It may be that their debt load is too high or their income is too low. They may have a poor credit score or no credit history at all. In any of these situations, rent-to-own gives a tenant time to build their credit, pay down debt, and put themselves in a position to purchase the home when the lease expires.

In other words, a person may enter a rent-to-own contract because they want to be in a house but are not currently able to make the purchase. Homeowners know this. It's easy for a homeowner to "write the rules" of the contract, particularly if they have more than one party interested in the property.

If you're working with a homeowner who's willing to negotiate the details of the contract (and that's where the important stuff is), you're in a good situation.

While there are dozens of decisions to make regarding a rent-to-own home, one involves when the home will be appraised. To ensure that you and the homeowner are on the same page when it comes to how much the home is worth, you can order an appraisal before signing the contract. Or, you may want to wait until your lease is up and you're ready to buy, just in case home values fall over the next few years. Of course, there's no rule that says you can't have it appraised twice. However, if that's your desire, you need to negotiate with the homeowner.

2. Inspections are welcome

If the current homeowner doesn't want you to hire a home inspector before signing a rent-to-own contract, walk away. As with any home purchase (even if it's in the future), you need to know the condition of the property you're committing to. Why lease or buy a home that may fall apart or require expensive repairs during the time you live there? A home inspection can help prevent that.

3. The option fee is reasonable

When two parties enter into a rent-to-own contract, the tenant normally pays a fee. This fee is meant to ensure that neither party will break their end of the bargain. Called option money or option consideration, this fee typically ranges from 2.5% to 7% of the value of the home. So, if the house you're looking at is worth $200,000, the option fee would be between $5,000 and $14,000.

You're in a good position if the homeowner is willing to charge less for the option fee.

Note: There should be a clause in the contract outlining what happens if the homeowner breaks their end of the contract. For example, you could suggest the return of the option fee, funds put away toward your down payment, and possibly, a penalty if the homeowner changes their mind. In any case, it needs to be in writing.

4. You don't feel as if it's a compromise

Depending on the market, there may be few rent-to-own options available. If you look at a house and it's not close to what you want or need, or if you must talk yourself into liking a property, that's a compromise.

Compromises in life can be good, but given the amount of time, money, and effort you're going to put into this house, you should like it -- a lot.

5. An attorney signs off

Like any home purchase, it pays to have a professional look out for your best interests. Since there's unlikely to be a real estate agent working on your behalf, pay a real estate attorney to review your contract before you sign. It can save you money over the long term.

While there are few "perfect" situations in life, understanding how rent-to-own works and setting strict boundaries does set you up for success.