With as much as house prices have risen over the years, especially here in Colorado Springs, the rent-to-own process often feels like a great alternative. Unlike the standard rental situation, rent-to-own properties give renters the opportunity to actually invest a portion of their monthly payments toward the future, instead of simply making payments. But if the rent-to-own process was that straightforward, why don’t more people do it? Let’s break it down. Here’s what you need to know about renting to own:
How the Rent to Own Process Works
The rent-to-own process is pretty much what you might expect. It’s a way to give renters a chance to buy real estate, and to live in the property until it’s time to buy. Generally, with rent-to-own deals, a portion of each month’s rental fees are set aside and go toward the price of the home. That way, if $200 of each month’s rent are specifically for the purchase price of the home, the renter will have $4800 designated toward the price of the home in 2 years. Not bad, right?
When setting up a rent-to-own agreement, renters can also agree to pay a premium payment. This is a single, up-front payment that typically ranges between 2.5% and 7% of the home’s price. This larger up-front payment goes along with an agreement to lock in the home’s sale price, regardless of what happens in the local market.
There are two common agreements: the “lease option agreement” and the “lease purchase agreement.” In a lease option agreement, the property owner and renter agree that the renter is guaranteed the option to buy the property after a contractually determined amount of time. The lease purchase agreement is very similar; however, at the end of the agreed upon time period, the renter must purchase the property.
Pros of Rent-to-Own Agreements for Buyers
Better ROI
The biggest upside of the rent-to-own process is that it’s a way to put your monthly rental payments to good use and actually invest some of it — unlike the traditional rental process, in which you pay to live somewhere, but don’t get any sort of return on that financial investment. With a rent-to-own agreement, a portion of that monthly rental payment can be set aside to help pay towards eventual ownership. For many, it feels a lot less onerous to make small payments every month than worrying about coming up with a huge down payment.
Locking in a Sale Price
Another huge benefit for home buyers is that the rent-to-own process can provide some substantial savings. By locking in the sale price of the home, rent-to-own buyers will already have a number to work towards when the agreement time expires and it’s time to purchase the property. In areas that may see higher market growth, like Colorado Springs, this is especially ideal since it can keep that property price down while other homes in the area cost much more.
Try Before You Buy
Unsure how well a house will work for your family or needs? The rent-to-own process gives you the chance to see how well (or poorly) a property works for you. It’s a chance to learn more about the neighborhood, experience the commute, check out the nightlife, and try the local schools. Just remember to negotiate a “lease option agreement” if you’re not sure you want to buy that home in the end.
Buy With Poor Credit
For many aspiring home buyers, the issue of a lower credit score could be a big hurdle standing in the way of ownership. Renting to own is a good way to work with that problem. It allows renters the time to work on building up their credit while paying towards their future home. For those who weren’t able to qualify for a home loan initially, this can be a good way to make strides toward mortgage qualification.
Cons of Rent-to-Own Agreements
If you’ve heard the saying, “If it sounds too good to be true, it probably is,” this is a good example of that. While there are plenty of reasons that a rent-to-own agreement can be great, there are a few concerns to consider before diving in. That’s not to say you should be wary! Just go into a rent-to-own agreement after carefully considering whether this is the right option for your specific situation. Some of those concerns include:
Potentially Forfeiting Money
When a rent-to-own agreement goes well, it’s a great investment. But if you decide you don’t want to purchase the property at the end of the rental term? Well, that’s the biggest pitfall. Generally speaking, if a renter chooses not to buy the property, they don’t get that additional money back. This is why it’s so important to be sure the property and area should be a good fit before you sign the agreement. Also, be sure to read your rent-to-own agreement carefully, and possibly even work with a real estate lawyer. Some owners will try to make the property as unappealing as possible in order to dissuade renters from buying and pocket that extra money.
No Guarantee of Financing
One of the big reasons many will choose to enter into a rent-to-own agreement is because of poor credit. However, it’s important to note that simply entering into the agreement isn’t enough to guarantee financing. It may be worth talking to a trusted mortgage lender or financial advisor to learn what steps you need to take in order to qualify for a loan before you sign on for a rent-to-own property.
Fluctuating House Prices
The local housing market can be a big benefit for rent-to-own scenarios, but it can also be a detriment. If you enter into an agreement and lock in a price to buy the home and local prices go up, great! If local house prices go down, however, you may not be able to negotiate the price of the house down. That means forfeiting the money paid or buying the house at the higher price — and if you do the latter, you may struggle to get loan approval for an oversized loan.
Late Payments Have More Impact
This is a big reason to read your agreement carefully. When you’re late on a rental payment in a traditional rental, you may be hit with a late fee. Rent-to-own properties may come with even more consequences. Late monthly payments could cause you to forfeit extra money paid, lose your right to purchase the house, or have your extra payment for that month not count toward the future purchase. Just be aware going in and know what your agreement says.
Home Repair Responsibility Questions
Another big difference between a traditional rental and a rent-to-own property is the question of who is responsible for maintaining and repairing the property. Sure, things like basic lawn maintenance and cleaning would be your responsibility even in a traditional rental. However, in many cases, the renter in a rent-to-own property is responsible for most or all repairs and upkeep because the agreement anticipates that they will purchase the home. Check your agreement and consider negotiating with the owner before signing. You can also talk to your real estate agent about having an inspection done before signing, so major issues can be caught and discussed.
Less Purchasing Certainty
Something else to consider with any rent-to-own property is the level of uncertainty around the eventual home purchase. On one hand, having the time to boost your credit or get finances in order can be a good thing. On the other hand, that still provides a couple of years in which something can go wrong through no fault of yours. If the home is foreclosed or the owner ends up with a tax lien on the property, you could miss out on purchasing the property and, potentially, forfeit the extra money you have been paying toward the purchase. Talk to your Realtor to be sure that situations like these are accounted for in the agreement.
Should I Rent to Own?
Ultimately, the decision to enter a rent-to-own agreement is going to be a very individual one based on your circumstances. While it can be a great way to enter into home ownership, there’s no guarantee that it will be the right fit for everyone. Want to know more? The best place to start is a discussion with your local real estate agent. Connect with the real estate team at Holly Quinn & Associates to start exploring your options in and around Colorado Springs!
