If you’re in the market for a new home, you may have seen homes on the market that are dubbed as “rent-to-own.” The phrase itself may seem a bit of an oxymoron. How can you possibly go from renting a home to owning it? What are rent-to-own properties, and how do they work? Keep reading to find out all you need to know about rent-to-own homes and properties!

What Are Rent-to-Own Homes?

As the name implies, rent-to-own homes are homes that are purchased through a rental agreement with a property owner. These rent-to-own properties are still paid monthly, like any other rental, but a portion of the payment goes towards rent while the other goes towards the home’s sales price. This effectively reduces the overall sales price of the property itself. The time frame for the lease is typically between 1 and 5 years, and after the lease is up, the renter will have the option to purchase the home.

In the United States, rent-to-own homes began to gain popularity in the 1950s and 1960s. Additionally, you’re more likely to find rent-to-own properties in slower markets, where it is harder to sell homes for their full sales price from the beginning. 

The basis behind the rent-to-own sales model allows for the renter to build their credit and save their money while living in what would be their “forever home.” For property owners, there’s a risk involved, as the renter may not be entirely ready to purchase the home at the end of the lease. That being said, there are things to look out for when looking to purchase a home through the rent-to-own model, but we’ll cover that later on in the article.

How Do Rent-to-Own Homes Work?

Rent-to-own homes are relatively similar to standard leases in their agreements; however, there are a few differences. 

The first difference is the structure of the monthly payments. When purchasing a rent-to-own property, the cost is much higher than that of a typical lease. The additional cost is a premium on top of the normal rent price that goes towards the purchase of the house once the lease has ended. This sum of money usually is non-refundable, and any prospective buyer going into a rent-to-own agreement should be fairly certain that they’ll be able to buy the property once the lease has ended.

How to apply for rent-to-own homes is slightly different, as well, and there are fees that come into play. Usually, there is an “option fee” due at the time of the lease signing. This fee is also non-refundable in most cases and, on average, costs up to 5% of the house’s purchase price. 

The last difference when it comes to rent-to-own properties is based on the purchase price for the house. Part of the application process, as well as the process of ending the lease, revolves around the purchase price of the house. The renter and the landlord will have to come to terms on what price the home will be purchased for once the lease has ended. This can be decided at the beginning of the lease or the end, depending on the specific contract you may be entering.

How to Find Rent-to-Own Homes

When looking for rent-to-own homes, it will be easiest to find them in slower housing markets. It’s also possible to approach sellers who have had their homes on the market for a longer period of time without any prospective offers. This is normally in instances of three months or more.

Most often, however, you’ll find physical advertising for rent-to-own homes far more frequently than you will find digital advertising for them. 

Pros and Cons of Rent-to-Own Homes

If you’re considering the rent-to-own option, check out our lists of pros and cons below.

Pros of Rent-to-Own Homes

When looking at the advantages of rent-to-own homes, consider the following:

  • Rent-to-own properties allow people who would normally struggle to save money for a down payment for a mortgage
  • If the rent-to-own agreement determines the purchase price at the beginning, the buyer may be able to lock in a lower price for the home than if they were to purchase it in the traditional manner
  • The rent-to-own option allows possible purchasers to get a feel for the neighborhood that they may end up living in and can help them to avoid it if it isn’t the right fit

Cons of Rent-to-Own Homes

As with anything, there are also possible disadvantages to entering into a rent-to-own agreement. Be sure to take the following into consideration:

  • As we touched on earlier, it’s important to understand your rent-to-own agreement fully before signing; there are lease-purchase contracts that require renters to purchase the home at the end of the lease no matter what, not allowing renters to end the purchase option
  • Rent-to-own homes are a large upfront fee, as well as a lump sum of money accumulated from monthly payments, that are not refundable should the renter decide not to purchase
  • Until the home is purchased, in most cases, no major upgrades or changes can be made to the home; this can lead to long wait times to renovate depending on the term of the lease

The ideal candidates for the rent-to-own property option are prospective homeowners who may not have the money saved up for a down payment. They may also need time to build their credit before applying for a home loan. 

Learn More About Ratecloud’s Mortgage Options

If you’re coming to the end of a rent-to-own lease, or you’re ready to purchase a home outright, look no further than Ratecloud. Get started on your digital mortgage application with Ratecloud today!