Rent-to-Own Your Home: The Pros and Cons

A rent-to-own home can present solutions to both buyers and sellers in a difficult position. For buyers, there is an option to begin living in and making payments on a home for purchase without first having to make a down payment. For sellers, there is an option to more to a new home prior to selling your previous residence, which can be critical in a slow housing market. In some cases, one of the parties will choose to terminate the contract because the disadvantages of the sale outweigh the advantages.

Pros to a Buyer

A buyer gets to live in a home to try it out for a few years before committing to a sale. This can be advantageous if the buyer is not exactly sure whether the home, neighborhood or other factors will meet his or her unique needs. It is also advantageous because the buyer can enter the lease with no money down. First-time home buyers, those recovering from bankruptcy or those currently ineligible for a mortgage are good candidates for this reason. They can make payments to cover the sellers mortgage, plus an additional small sum to the rent-to-own contract, in order to be eligible to purchase the home in the future.

Pros to a Seller

Sellers often have to capitalize on rent-to-own options when they need to leave their current house before it has sold. This can happen due to relocation, but it is often a symptom of a very slow real estate market. This is a great alternative to a short sale. The seller is able to get out of mortgage payments but avoid selling the home at the bottom of the market. Sellers may also have more time to contribute to principal debt, lowering the amount owed on the home after sale does occur.

Cons to a Buyer

Rent-to-own options cover a mortgage plus an additional fee. This means the monthly payments will be higher than a traditional rental unit. If the buyer chooses not to execute the option to purchase, any payments made to the down payment that would be used to purchase the home will be lost. Further, if a buyer does end up purchasing the property, the expenses paid to the home so far plus the cost to purchase the home will be higher than if the buyer simply purchased the home in the beginning instead of renting temporarily. 

Cons to a Seller

There is no guarantee the contract will go through. This means the seller may be out of luck after another few years, back in the same position with a home unsold. Further, at that point, the leaser may have actually done damage to the property. The contract stipulates the condition the home must be maintained in, but it is all too common for individual renters to ignore these stipulations. It can be hard to recover payments from a borrower who has not maintained a property. Any seller who allows another individual to live in a home he or she does not yet own is exposed to a tremendous amount of liability in this manner.