Is a Rent-to-Own Lease a Good Idea?

If you are thinking about signing a rent-to-own lease, you may want to reconsider. Here are some reasons that it may not be a good idea.

If you are thinking about signing a rent-to-own lease, you may want to reconsider. Here are some reasons that it may not be a good idea.“Buying your own real estate makes sense. There are occasions when growth stops, or even reverses as in the recent recession. However in general real estate is a good investment but not at the wrong price. “

During the early 2000’s, real estate values grew at an impressive rate. When the subprime mortgage crisis put a sudden and dramatic stop to that, things changed markedly. Values plummeted.  For several years, demand for housing was weak. For homeowners who bought in the years immediately preceding the crisis, this was a nightmare. Their investments were upside down due to negative equity, causing them to be financial prisoners to their own homes.

Today, growth in the housing markets has once again resumed, but there are also problems for people whose credit score still reflects their recent financial problems. Unfortunately, because of their past credit problems, some of these people still struggle to get a mortgage or come up with a deposit.

A Lease with a Right-to-Buy

For those who are still captive to the credit problems brought on by the Great Recession, one solution is to rent-to-own. In this instance, renters to lease a property and negotiate a stated price at which they can purchase the property at the end of the lease. It provides some time for the potential buyers to get their finances in order before making the purchase.

On the surface, it is a win for both the buyer and the seller. However, renters may not always get the best value for their money.  The homeowner clearly has the upper hand in negotiating. The buyers’ options are limited, allowing for the homeowner to dictate the terms and the price of the agreement. Potential buyers should be aware of this before making any commitments.

How it Works

In order to secure a mortgage, the new buyers are going to be required to secure a deposit. That is where the rent money comes in. During the term of the lease, some of the monthly rental payments will be placed into an account that can be used for the deposit.  Buyers will need to put down 5% of the agreed upon purchase price at the start of their lease. Of course, mortgage companies may require a larger deposit than just the 5% plus the money set aside in the rent payments, especially if the buyer has poor credit. Therefore, renters are encouraged to save as much money as they can during the lease period.

The Risks Are One-Sided

The other problem is that the risk falls all on the buyers. In most contracts, the buyer really has no way out if they break the agreement. The 5% deposit will be lost and often the savings that have been amassing as well. The seller may have lost a sale but will have the deposit and perhaps much more. For this reason, it seems like a better strategy to simply rent and save a deposit in a separate personal savings account.

There are too many variables and too many things that can go wrong with rent-to-own situations. It makes more sense to look at the whole financial picture and the online lending sector that exists today. A poor credit score doesn’t need to be a barrier to borrowing money. Online quick loan lenders tend to place much more store on current circumstances, regular income, and the ability to repay a loan than a on your credit score alone. As a result, someone wanting to get on the real estate ladder may have far more options than they think.

Before signing a rent-to-own agreement, do your research to get a clearer picture of the alternatives available. They may be less risky and less expensive. After all, no one becomes a home owner simply by signing a rent-to-own contract. There is no reason to be impatient and end up losing money over the long run.


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