- Rent-to-own homes could seem like a good idea with home prices going up.
- You can use a rent-to-own program to get into a house more quickly.
- Unfortunately, there are huge risks to rent-to-own deals.
Don't do a rent-to-own deal without reading this.
Home prices have gone up dramatically over the past few years, making homeownership more difficult for many would-be buyers. As a result, rent-to-own deals can seem attractive.
With a rent-to-own agreement, you typically negotiate a purchase price for a property you are interested in and then you move in. You begin paying rent to live in the home, but some portion of your rent goes toward covering your future purchase of the property. At the end of a designated period, you can buy out the lease and it may be easier to get a mortgage since you already have equity in the home from the rental payments you made.
While this may seem like a fast and easy way to become a homeowner, finance expert Dave Ramsey warns against taking this approach to buying a property. In fact, on a recent show when a caller asked about his rent-to-own property, Ramsey unequivocally stated, "Never do rent-to-own."
Here's why Ramsey believes this method of buying a home is a terrible idea
On Ramsey's June 24, 2022 show, a caller asked if it would be a good idea to take out a loan to buy out a rent-to-own home rather than continuing to make rent payments with part of the money going toward the principal.
Ramsey explained one key reason why he thinks that the rent-to-own transaction was the wrong way to purchase a house. "The reason is the house is not in your name. If the current owner gets in trouble, you lose everything. And there's nothing you can do about it." he said. "Let's say the current owner was sued. It goes as a lien against his property. This property is not in your name, it's in his name. You would lose all this equity."
Ramsey urged the caller to get a loan from a credit union ASAP to get the house into his name, describing the situation as "very dangerous" and explaining he was currently in a precarious position.
Ramsey also explained some additional downsides of rent-to-own on the Ramsey Solutions blog. These included:
- Paying higher rent
- Paying more for fees and repairs if you're responsible for covering them
- Potentially paying more for the home than it is worth because you lock in the purchase price early and property values could fall
- Losing money if you decide not to buy the house because you would likely have to walk away from the contract without getting back the extra rent payments you paid
- Risk losing money because rent-to-own contracts typically favor sellers
- Potentially losing the equity if the landlord is foreclosed on or sued
However, he acknowledged there are some pros including the ability to build up a down payment over time as part of your rent payments.
Is Ramsey right about steering clear of rent-to-own properties?
Ramsey is right that rent-to-own isn't an ideal option. If you can qualify for a mortgage and buy a home the more traditional way, this is a better approach. The house will be in your name right away, so equity you build in the property would be yours to keep if you have to sell.
But a lot comes down to your situation and the details of your contract. If you are eager to buy a home and want to build equity as part of your rent payments -- and if the contract you enter into has reasonable terms -- this might be an option you want to take advantage of. Just be sure you are aware of the risks and read the fine print so you don't end up with an agreement that causes you to lose money in the end.
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