Pros and Cons of Buying Rent To Own Homes In Real Estate
In order to buy a home, a buyer must either have enough cash to purchase the property or they must obtain a mortgage to pay for the property. The majority of home buyers don’t have the cash laying around to purchase a home so obtaining a mortgage is their other option. To obtain a mortgage a buyer must have good credit, solid employment history, and a substantial amount of money to cover the down payment and closing expenses.
There are many buyers who would love to obtain a mortgage but may not meet all the criteria required to obtain one. If this is the case, a frequently asked question from home buyers is, “how do rent to own homes work?”
Rent to own homes can be an ideal fit for some buyers and a terrible one for others. It’s important that before pursuing a rent to own home that you fully understand the pros and cons of rent to own homes in real estate.
Below you’ll find out what a rent to own home is, what the benefits are to a rent to own home, and also what the drawbacks are to a rent to own home. By evaluating the positives and negatives, you’ll be able to determine if you should pursue a rent to own home or not.
What Is A Rent To Own Home?
A home that is being sold with the rent to own possibility is a property that allows a buyer to sign a contract that gives them the opportunity to buy the home in a specific amount of time in the future. Rent to own homes are also frequently referred to as a lease purchase.
A rent to own home is similar to leasing a brand new car. It allows the buyer to pay a specified amount of money per month with the ability to purchase the home at the completion of the term. The monthly rent sometimes can be used towards the purchase once the contract is completed.
Rent to own contracts can range anywhere between a couple years up to 5 or 6 years. At the end of the contract, the buyer has the option to purchase the home or simply move out of the property.
Pros To Buying Rent To Own Homes
Pursuing a rent to own property does provide some benefits. If you’re thinking about pursuing a rent to own home, below you’ll learn about the benefits to them.
Allows A Buyer To Secure A Home
If a buyer is considering a rent to own home, it’s likely because they don’t have the means to obtain mortgage financing or don’t have the cash available to purchase a home outright. One of the obvious benefits of a rent to own home is it allows a buyer to secure a home.
Many buyers grapple with the decision whether they should continue renting or buy a home, but not all buyers can buy a home. Rent to own homes allow a buyer to achieve the best of both worlds. They’re able to rent a home and not an apartment with the goal of making it their own once the contract is completed.
Provides A Buyer Time To Work On Their Financial Situation
Another advantage of a rent to own home is it provides a buyer the time to work on their financial situation. Some buyers need some time to repair their credit or save additional money for a down payment and closing expenses. A rent to own home gives a buyer the additional time needed to do so.
As mentioned above, having good credit, solid work history, and money available to pay for the down payment and closing expenses is critical when getting a mortgage. A buyer who meets this criteria has the best chance of getting the best mortgage rate when buying a home.
If you need to repair your credit score or save additional money in order to buy a home, a rent to own property maybe a good fit so that you have additional time to work on these items.
Learn If Owning A Home Is A Good Fit
Owning a home is not for everyone. There are certain tasks and maintenance that are involved with owning a home. For example, if you own a home in a climate that experiences cold winters, you’ll need to know how to winterize a home.
A benefit to a rent to own home is it provides a buyer the ability to experience what is involved with owning a home and can help them determine if it’s a good fit or not. Since a rent to own contract allows a buyer the option to buy a home or not at the completion of the contract, it provides an “out” if they decide home ownership is not for them.
Cons To Buying Rent To Own Homes
As you decide whether a rent to own property is the right fit or not, it’s critical that you know some of the drawbacks of them. Below you’ll find out what the most common cons are to buying a rent to own home.
Risk Of Losing Money
One of the biggest drawbacks of buying a rent to own home is the potential of losing money if you decide to not pursue the option at the completion of the term. If you decide at the end of the rental contract that you no longer want to buy a home or that the specific home is not the right fit, you’re likely going to forfeit the money you provided as a down payment and also all of the monthly rent that would’ve been used towards the purchase.
In addition to the loss of the down payment and the money spent on monthly rent, buyers who’ve completed home improvement projects now lose out on the money spent towards the improvement projects. Depending on the improvement projects a buyer completes, this could potentially be thousands of dollars lost.
Mortgage Interest Rate Changes
There is no way to predict exactly what mortgage interest rates will do over the next couple weeks, months, and better yet, years. Another negative of buying a rent to own home is the possibility of mortgage interest rate increases. If mortgage interest rates increase from 4.0% to 6.0%, this can be very costly for a buyer.
For example, if a buyer is purchasing a $200,000 home at a 4.0% mortgage interest rate, their monthly payment would be approximately $955, not including taxes and insurance. If the same buyer purchases the $200,000 home at a 6.0% mortgage interest rate, their monthly payment would be approximately $1,199. This is a huge difference in monthly payment but it’s also important to note that the total repayment difference is substantial. The repayment at a 4.0% mortgage rate would be roughly $343,739, while at a 6.0% interest rate, it would be approximately $431,676. This is almost an additional $100,000 over the course of 30 years.
Higher Sale Prices
In many cases, homes that are able to be purchased as a rent to own will be sold at higher prices. The primary reason that a seller will demand a higher price for a rent to own purchaser is because they have to wait longer to sell the property.
A higher sale price is an obvious con to buying a rent to own home. Buying a home at a higher sale price can create major issues in the future when the time comes to sell the property. Sale prices are negotiable, however, if you’re buying a home in a sellers market as a rent to own option, it’s important to remember that you may pay more for a home than a cash buyer or a buyer who is obtaining mortgage financing.
Not only can sellers demand a higher price for a rent to own buyer, but it’s also possible the real estate market could take a hit and values could decrease. In this situation, the possibility of renegotiating the sale price is highly unlikely. Before buying a rent to own property, it’s important that you request a real estate agent provide a comparative market analysis on the property so that you’re comfortable you’re not paying way more for the property than you should.
Owner Could Potentially Lose The Home
A big risk of lease purchases is the potential that the owner loses the home through foreclosure. There is no guarantee when buying a rent to own home that the seller will continue to pay the mortgage and real estate taxes.
If the owner decides they no longer want to pay for the home or don’t have the means to do so, all of the money you’ve invested in the lease purchase will be for nothing. Before agreeing to a lease purchase, it’s a good idea to ask about the mortgage payment history and balance. If the owner has a very small mortgage balance remaining on the home, there’s a good chance they’ll continue to pay the bills on time.
If you’re thinking about buying a rent to own property, you need to consider all of the pros and cons. It’s highly recommended before pursuing a rent to own property that you interview buyers real estate agents. Having a real estate agent who has past experience in rent to own transactions will help protect your best interests. In addition to having an experienced buyers agent, you should strongly consider having an attorney review any rent to own agreement before signing.
There are many reasons why real estate markets are different and before shopping around for rent to own homes in your area, you need to educate yourself on your local market. Rent to own properties in many areas are rare, including the Rochester real estate market. Buyers who educate themselves on their local market reduce the chances they’ll be disappointed if there is not an abundance of lease purchase opportunities.
Other Rent To Own Resources
- Lease Purchases – Pros, Cons, Tips and More via Bankrate.com
- Which Type Of Mortgage Is Best For Me?
- When Lease Purchases Are The Way To Go via Total Mortgage
Are you looking for rent to own homes in Rochester NY? If so, it’s very important that you understand what the benefits and drawbacks are to them. As you can see from the above information, buying one can be quite complex. If you haven’t hired a Rochester NY buyers real estate agent, contact me, and I’d love to help you decide if a rent to home purchase is the right fit for you or not.
About the authors: The above article “How Does Buying Rent To Own Homes Work In Real Estate?” was provided by the Keith Hiscock Sold Team (Keith & Kyle Hiscock). With over 30 years combined experience, if you’re thinking of selling or buying, we’d love to share our knowledge and expertise.
We service the following Greater Rochester NY areas: Irondequoit, Webster, Penfield, Pittsford, Fairport, Brighton, Greece, Gates, Hilton, Brockport, Mendon, Henrietta, Perinton, Churchville, Scottsville, East Rochester, Rush, Honeoye Falls, Chili, and Victor NY.
© 2016, Kyle Hiscock. All rights reserved.