Rent To Own Contracts: Is It Worth Buying a Home This Way

You may have been considering the thought of buying a home lately.  One option that has become fairly popular over the years is what is known as rent to own contracts.  However this option may not be what you think it is and you will defiantly want to read this article before you consider a rent to own contract.

What Are Rent To Own Home Contracts

Rent to own contracts for homes are an agreement set up between a buyer and a seller that give the buyer the right to buy the property between a specific time period, in most cases it’s around 1 to 3 years.

The seller will then pay the seller rent over this period and a portion of it will go to the seller to cover his mortgage cost and part of it will go towards a down payment.

For example if you had a $1200 rent payment $400 of the money may go towards the down payment and the other $800 will go towards the normal rent.  Knowing this you might be wondering what would be the benefits of going this route?

The Good Reasons

First off, this option gives you the opportunity to see if the house and the neighborhood would actually be a great place for you to live.  If for some reason down the road you decide not to take the owner up on his rent to own contract you don’t have to do it.

Second, as I mentioned earlier a lot of sellers will put a portion of this money towards your down payment on the home.  This way when you go to buy the home you will already have equity in it.  In fact in some cases some sellers are willing to put as much as 100%of the money towards the down payment just to sell the home.

Third and finally, this option also gives someone who might have bad credit to have the opportunity to buy a home that they might not normally be able to buy the traditional route.  With this option you might be able to get seller financing without having to work with the banks.  In fact some loans like FHA loans are assumable which means you could even take over the current sellers mortgage payments by signing a few papers.

However, as good as the reason are to get a rent to own home contract you also need to consider the negative to them as well.

The Bad Reasons

First off, if you decide to buy the home and you would happen to be laid off from you job and get behind on payments and even worse get evicted you would lose all of the money you paid thus far including the down payment money to buy the home.

Second, having bad credit can be also give you some issues if you have to get financing once you decide to buy the property.  If you fail to come up with the proper financing you could lose everything  you’ve stuck into the property.

Third, you also need to consider that the land value may change as well depending on the area you are buying in.  For example lets say the house you are buying was appraised for $250,000 when you signed the contract but after 3 years of making payments the value drops to $200,000 you may have to still pay the full amount that home was  originally appraised for.

Finally, you need to consider how much more this may cost you versus going the traditional route.  For example if you would have gone the traditional route for a home worth $100,000 at 6%  you would have a mortgage payment around $600 a month.

With a rent to own contract you will likely be paying more than the average rent for a property.  In are example let’s say it’s $1000 a month for rent and $400 is going towards the down payment and the other  $600 will be going toward rent payments.  If you were to spend 3 years paying on the rent to own contract you would end up paying $21,600 toward rent that you could have otherwise put toward your home.

Rent To Own Checklist

Finally, to close this article if you are still considering rent to own contracts I have put together a short checklist for you to consider before you sign on the dotted line.

  • Talk to your attorney. The first thing you will want to do is contact your attorney to review the language in your rent to own contract.  Things like financing and payments should be clearly defined and spelled out.
  • Get your home inspected. Before you decide to buy the home have it inspected for any flaws it may have.  A close family member of mine recently bought a home and noticed afterwords that it needed new wiring which cost him over $5000 to have done.
  • Get an appraisal. Having your home appraised will let you know what it’s true value is worth.  Knowing this could keep you from overpaying on the home.
  • Check your credit. If you decide to buy the home know what financing options are available.  If they don’t offer sellers financing or an assumable loan option and you have to get your own financing and you can’t qualify you could end up losing a lot of money.

Is Rent To Own For You

Finally, is rent to own contracts for you or is it not?  For me I guess it all depends on the situation.  If if you’ve followed the checklist I’ve laid out above you should be OK but if you have a hint of doubt you may want to consider other options like renting or the traditional method of getting a mortgage.  Feel free to share your comments as to how rent to own home contracts have worked for you.

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