The Pros and Cons of Rent-to-Own

December 5, 2014 | by Katie Claflin

Categories: Homeownership

Stricter credit requirements, rising home prices and stagnant wages can make it more difficult for families and individuals to qualify for a mortgage right now.

As a result, some consumers may want to consider a rent-to-own contract (otherwise known as a lease-option contract) in which they can apply their rent payment toward the purchase of their home. While there are advantages to this type of contract, there are also some significant risks.

How it Works

Rent-to-own contracts can vary, but generally they work like this:

  1. The renter agrees to lease the house for a set amount of time, usually one to three years.
  2. The renter pays an up-front fee (called an option fee), which is typically 1-5 percent of the home’s purchase price. The fee is usually nonrefundable, but part or all of it can be applied to the down payment.
  3. The renter may also pay a higher monthly rent, but a portion of the rent will go into a fund that is later used for a down payment.
  4. The contract locks in the purchase price of the home.
  5. The renter can purchase the home on or before the lease’s expiration date.

For more information on how rent-to-own agreements work, read this article on the National Association of Realtors website.

Advantages and Disadvantages

There are a couple of significant advantages to a rent-to-own contract.

  1. It gives renters the opportunity to build their credit and save for a down payment while also building home equity.
  2. It gives renters an escape plan if a family member loses their job or if the home’s value drops.

While this may seem like the ideal situation for many families not yet ready to become homeowners, there are risks involved with this type of financing.  Below are some of the major disadvantages.

  1. If renters are not prepared to buy the home at the end of their lease, they may lose their option fee and portion of their rent set aside for their down payment.
  2. Renters will miss out on the current low interest rates for mortgages and may face higher interest rates at their end of their lease.
  3. Renters may be forced to pay a higher than market price for their home if the value of the home decreases during the lease period.

For more information on the pros and cons of rent-to-own, read this article published in Forbes.  Anyone considering a rent-to-own agreement should also contact a real estate attorney for assistance.


On the House blog posts are meant to provide general information on various housing-related issues, research and programs. We are not liable for any errors or inaccuracies in the information provided by blog sources. Furthermore, this blog is not legal advice and should not be used as a substitute for legal advice from a licensed professional attorney.

Comments

Laura Ross

Hi Lee, we suggest you contact a real estate attorney or legal aid for assistance. A list of Texas RioGrande Legal Aid offices can be found on their website at http://www.trla.org/office.

Lee Turner

I own a bare lot, with utilities. If I want to sell it the “rent to own”, when would we actually go through the title process? Or, can this just be something in writing that is agreed upon by both parties, then do the title transfer when the right time comes?
Thank you

Laura Ross

Hi Scotty, we suggest you contact a real estate attorney or legal aid for assistance. A list of Texas RioGrande Legal Aid offices can be found on their website at http://www.trla.org/office.

Scotty Myers

I have a lease to own agreement on our house which we have been in for over 10 yrs and have renewed every year until the last 2 years due to neglect on both parties “ did not receive a new lease to sign nor did I aggressively demand it as in good faith by both parties we continued to for fill all aggreament” in the past year my spouse and I have been in a legal seperation thru Texas and County Family civil court system where due to uncontrollable reasons I lost my job and my spouse who has temporary possession of the property and I have defaulted in the payments. We have paid out 60% of the total purchase aggreament. House was maintained by us as well as over $30,000 in improvements were made to date note we owe $50,000 of the $120,000 on the aggreament property easily valued at over $160,000.The seller or lessor has sold the house to third Party unknowningly for over $150,00
and we received a notice vacate and relinquish the property by and to the third party. Do have any rights in this and my investment or settlement s from the property.. Please help with any advice.

Laura Ross

Hi Beatrice, a real estate attorney can answer your question. You can also contact Texas RioGrande Legal Aid, Inc. for assistance. Their website is http://www.trla.org/office.

BEATRICE JUAREZ

Can my father repossess his rent to own home during a chapter 7/11/13?

Laura Ross

Hi Christine, a real estate attorney can answer your question. You can also contact Texas RioGrande Legal Aid, Inc. for assistance. Their website is http://www.trla.org/office.

christine hernandez

hello we have a lease option to purchase contract on my mobile home, it has only been a year and half
our contract ends 3-1-2018 it has the rent 700.00 to go towards the 95000.00 of the home, the landlord called earlier and stated that her realtor will be coming out to take pics of home to put on market…... my question is we are wanting to purchase but fixing our credit nd she was fully aware of it…....what can we do??

Laura Ross

Hi Mary, a real estate attorney can answer your question. You can also contact Texas RioGrande Legal Aid, Inc. for assistance. A list of their office locations can be found on their website at http://www.trla.org/office.

Mary Lominac

On a lease to own can the one that is carrying the note does they have to go into they home for no reason.

Laura Ross

A. Johnson, a real estate attorney can answer any questions you may have. You can also contact Texas RioGrande Legal Aid, Inc. for assistance. A list of their office locations can be found on their website at http://www.trla.org/office.

A Johnson

So I have a question! My fiances mother gave us the option to Rent to Own a house they have, they have been using it to rent out. We wanted to see the property first of course, before making a decision. But they told us no because at the time someone was renting. I wish then I had done my research. They told us, if we gave them $2,000 for the down payment, they would give the renters their 30 day notice. Once they were gone, we finally got to go see this house. It was horrid….The entire home was infested with mold, falling apart, the smell alone made me sick. So we told them no not interested. We did NOT sign any contract what so ever. So we asked for our down payment back, but they are telling us no. Can we fight that?

Laura Ross

Hi Jamie, a real estate attorney can answer your questions about the rules and regulations for renting to own a home. You can also contact Texas RioGrande Legal Aid, Inc. for assistance. A list of their office locations can be found on their website at http://www.trla.org/office.

Jamie

Can you rent out a home when you’re currently doing a rent to own option?
I’m renting a home in McAllen TX & have recently discovered that our home had multiple owners persay. The mortgage holder lives in Mexico and did a rent to own to a previous tenant. This individual has since moved out and resides in Mexico as well, this individual placed a power of attorney to another individual to rent out the home. The last few months I have been being told the mortgage holder is filing foreclosure on the hom. There’s no money for repairs, the house is falling apart and I’m just curious if this is even legal process that they’re doing?

David Beard

It is unfortunate that the statutes have become so restrictive.  We had hoped to sell our home via a Lease to Purchase Option, as we have done in the past in other states, although it has been a few years.  In those cases, the buyers were extremely happy to use this process to purchase a home that would have otherwise been out of their reach.  And none had any problems with terms which included being responsible for upkeep, maintenance and repair of all major systems.  Using a two year term, these buyers went to closing with as much as 25% down.  Not a bad deal.

kclaflin@tsahc.org

Thank you for your comment.  You are correct that in 2005 the Texas Property Code changed, adding more restrictions to lease to own contracts.  Here’s a good resource that explains the contractual requirements of lease to own agreements.

http://propertytaxloansfortexas.com/resources/RenttoOwninTexas.pdf

Frost

I thought that after 2005 the rule became stricter for L/O arrangements in Texas.  How is this article, published 2014, still saying that there are 1 to 3 year options when currently we are not allowed to extend beyond 180 days?  Is this information outdated?

kclaflin@tsahc.org

Your landlord is responsible for any health and safety repairs to the home. The landlord is generally not obligated to pay for upgrades that just improve the look of the home, though some landlords may choose to do that to preserve the home’s value.  And your landlord is obligated to allow you to make any modifications to accommodate a disability, but the cost of the modifications generally falls on the tenant.  Check out our two blog posts on tenant rights and accessibility for more information:

http://www.tsahc.org/blog/post/know-your-rights-as-a-tenant

http://www.tsahc.org/blog/post/federal-accessibility-requirements-what-housing-providers-need-to-know

If you are considering a lease to own contract, make sure you contact a real estate attorney, who can advise you on how to handle who covers the repairs during the contract period.

G Spencer

Who pays for house repairs during the lease time? 

Can improvements like widening doorways for accessibility be done?

Adding sidewalk around the house?  Adding rolldown shutters for hurricanes? Landscaping?

Jamarcus Dantley

My wife and I have been looking more into rent to own options. We like that we would be able to establish some credit this way. Thanks for sharing that tip and others here. This should help us make our decision.

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