Most people assume there are two ways to secure a home: rent it or buy it. While these are definitely the most common options, you can also consider a lease-to-own (or rent-to-own) home. As the name implies, this is a residence you rent in the same way you might an apartment. However, after a certain time passes, you are given an option to buy the home (or not). And if you do decide you love the home and never want to leave, you can purchase it at a lower cost than if you just rolled up and decided to buy it on the spot.
How Lease to Own Works
Every lease-to-own house option varies depending on the specific contract drawn up between the homeowner and the new tenant. In most cases, you can expect the following options and clauses:
> Monthly Rental Agreement: As is the case with any rental, you’ll pay a monthly rent to live in a home. However, instead of the money going only to rent, a portion of it is usually set aside to serve as a payment on the house. If you decide to buy at the end of the contract term, that money will be subtracted from the home price. You might also be asked to pay in an “option fee,” or the money you spend to hold the option to buy open. In this way, you can build a down payment without actually setting aside money for a down payment.
> Fixed Home Price: The price you’ll be asked to pay for the home is usually determined at the time of the contract being signed, not the end of the lease option. In this way, you can be sure the homeowner won’t increase the sale price or take advantage of your option fee by adding it to the cost later. This can be helpful when the reason you aren’t ready to buy is fluctuating home prices. If you want to be sure of the stability of the market first, a few years of living in the home can help.
> Length of Rental: Most lease or rental options last between one and three years, though they can go longer. Like any rental contract, you’ll be required to pay your monthly rent on time and follow all the rules set out in the rental agreement. Ending your contract early or subletting the home may not be allowed without a fine.
> Rental Terms: Because you’ll be living in a home that isn’t yours, it’s important to have the rental terms set out as they would be in any rental contract. Who pays the utilities and provides upkeep of the home? What happens if something breaks in the middle of the night? What happens if you don’t pay your rent on time? All of these considerations need to be outlined in the contract for the protection of both parties.
Is Lease to Own a Good Idea?
If you don’t have the credit or down payment to buy a home right away, a rent-to-own option can be a great way to make a home-buying dream come true. This is also ideal if you aren’t sure about the neighborhood the home is located in or if there might be fundamental flaws in the home that will only appear over time.
However, it can also be a risky venture. Homeowners might end up going into foreclosure and nullifying your contract. You might miss a payment and void your entire agreement. You may pay into a home for three years only to find yourself relocated for work at the last minute. Or you could find that even after paying into the house for a few years, your credit and/or finances won’t secure you the rest of the loan.
That’s why it’s best to work with a financial advisor or lender who can help you decide if lease-to-own is right for you. When done right, it can be a dream come true—and since all your belongings are already moved in, you can skip the moving van this time around!