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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Feb 8, 2021

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Housing prices are rising again and so are mortgage loan interest rates. However, in many parts of the country the debate on whether to rent or take the plunge and buy a home rages on.

What if there was a middle road though, a place to meet in the middle between these two choices?

That “place” takes the form of rent-to-own homes.

These arrangements are just the thing for buyers who may not (or cannot) go the route of a traditional mortgage loan.

Rent-to-own agreements account for a relatively small amount of the housing market. In fact, Febe Cude, Real Estate Agent and Market Manager for Redfin in Seattle, told that they are estimated to account for only 1 percent.

“We can tell you that in the Seattle market, we get about one request per week from a potential buyer for a rent-to-own agreement,” she said. “I can’t remember a time when a seller requested a rent-to-own arrangement.”

To learn more about rent-to-own homes, interviewed several mortgage loan industry and housing market insiders who explained everything that anyone looking for a rent-to-own home should know before making such a large decision.

Defining Rent-to-own

Rent-to-own, also called lease-to-own, has been compared to a car lease and works much the same way.

Marc Israel, Executive Vice President of Kensington Vanguard National Land Services, told that rent-to-own is just what it sounds like: a tenant rents a property from a landlord just like in a typical lease arrangement with the end goal of owning the home.  However, the lease gives the tenant an option to purchase the property at an agreed upon price by a certain date.

“Rent-to-own arrangements are for anyone who feels comfortable with this ‘layaway’ type plan that lets a buyer build their down-payment over time,” said Israel. “However, although anyone can take advantage of this arrangement, it is true that it may be particularly attractive to buyers who may otherwise have difficulty getting a mortgage.”

There’s another bonus though. The rent paid by renters each month is not just income for the seller. A portion of it is set aside as part of the down payment that will go towards buying the home if the renter chooses to purchase it after the designated term.

In effect, a rent-to-own agreement can allow renters who enjoy a home and its surrounding location to become the home’s actual owners.

The Inner Workings of Rent-to-Own

Since the Housing Crisis, property prices have begun to rebound.

In order to sustain this recovery, our nation needs more homeowners who can get financing. Unfortunately, not everyone who desires to buy can qualify for a home loan.

Here is where rent-to-own homes come to the rescue.

Steven Paul Cote, Executive Director of UpLifting Lives, told that rent-to-own home programs are suitable for some prospective homeowners since the steady build up of payments can lead to an eventual home purchase. He outlined how the program’s inner-workings lead to a successful home purchase.

First, the current property owner, potential renter, investor, or lender work with a licensed real estate agent or broker and agree to create an agreement for the transaction.

“The owner agrees to offer the property as available for a rent-to-own property listing and provides the terms and conditions,” said Cote. “The prospective tenant or future homeowner is identified and qualified as a renter, based upon the requirements of the property owner.”

The renter then begins making monthly payments on the lease, a fraction of which go to the down payment on the future home purchase. Then after the agreed-upon duration, such as after three years, the renter can apply for a mortgage loan to finance the rest of the house’s value, and  the homeowner will sign ownership of the house over to the renter.

Ceasing to be a renter, the new homeowner will then make monthly payments to their mortgage loan lender who fronted the money to buy the house from the landlord.

If renting to own is so seemingly simple and profitable for all parties involved, then why isn’t it the norm? Why isn’t it common?

It turns out that rent-to-own is not for everyone.

The People Who Would Rent-to-Own

People generally like to keep simple lives. The same applies to their finances.

In rent-to-own programs and agreements, consumers are still an arm’s length away from being true homeowners. The vast majority of homeowners transition from leasing apartments to becoming outright homeowners. This is just the way living situations typically progress.

Rent-to-own agreements stick leasers into the position of being homeowners-in-waiting until a set number of years pass. It really isn’t an option for people who are “ready right now” and looking to immediately take the plunge into homeownership. For the sake of allegory, rent-to-own is the equivalent of walking into a cold pool slowly rather than jumping right into it to quickly become acclimated to the temperature.

Even though it certainly isn’t the primary method of obtaining or selling a home, rent-to-own is still favored and enjoyed by a certain group of people.

The Appeal of Rent-to-Own Agreements

Phil Georgiades, Chief Loan Steward for VA Home Loan Centers, told that rent-to-own homes are great options for buyers who do not currently qualify for a mortgage loan. In fact, even those who can qualify for a home loan may find these deals appealing.

“Borrowers who may move in the future, such as those in the military, may use this option as they can begin the path of home ownership without the 30-year commitment that comes with a mortgage,” said Georgiades. “Borrowers who are unsure about the future of house prices may also want to consider the rent-to-own as an option. For example if a borrower thinks that house prices may decrease, a lease option is a good way to lock in the price of the home while not fully committing to the purchase.”

Georgiades pointed out that should home prices rise, the borrower is protected as they have an agreement for a set price. If prices go down, the borrower will only risk losing the rent paid — which would have been lost anyways had they rented anywhere else.

“While not a small sum of money, losing a few thousand can be better than losing a few hundred thousand,” he said. No doubt, many Americans still financially scarred by the Housing Crisis would agree.

On paper, it would also seem that young homebuyers, often lacking reputable credit scores while simultaneously possessing unprecedented amounts of student loan debt, would desire rent-to-own agreements just so that they can be one step closer to getting a home. But the demographic interested in rent-to-own homes are not exclusively the “young and desperate.”

Many of the former homeowners in America lost their homes during the Housing Crisis. Cautious to plunge into a full-fledged mortgage again, many turn to rent-to-own agreements, allowing their families and households to return to the homes they were accustomed to.

By entering into rent-to-own agreements, former homeowners (of all ages) that are returning to homeownership can cautiously make payments on a house, all the while retaining the option to abort the purchase before the multi-year lease period ends. While the landlord may be upset over abandonment, it would be a far better choice should a renter’s rental home value fall.

As Cote explains, the end result of rent-to-own agreements are to be as profitable for all parties as possible, regardless of their ages.

“The transaction decision is based on the best financial outcomes for all the parties,” he said. “This option provides homeowners and sellers to participate in the rebounding of the real estate market. Tenants are able to enjoy single-family living, and investors, when needed, will provide the financial bridge to homeownership with shareholders generating higher rates of return.”

Cote even said that there are boutique real estate companies emerging to serve this unique market by structuring transactions between sellers, renters, and investors.  By using technology to conclude the transaction electronically, it is possible to offer the rising generation of homeowners more options than ever dreamed of in real estate. After all, the current generation of young adults have grown up online and integrated their lives together with smartphones and apps.

Risks and Rewards

Like most any situation involving money, rent-to-own homes involve a level of risk along with their potential gain.

Buyers face a number of risks, such as getting evicted and losing all the extra payments that were made towards the purchase of the home.

Worse still, leases are not considered “contracts of purchase.” Legally, they do not bind landlords and sellers into carrying through with selling their homes to rent-to-own renters.

“As such, a tenant may not necessarily have all the legal protections he would have if he were a typical buyer of real estate pursuant to a contract of sale or purchase agreement,” said Israel.

Even though rent-to-own agreements seem like a very viable way for “subprime” people to attain homeownership, consumers may find it difficult to find a willing seller — especially in the current market.

“In today’s seller’s market, there is really no incentive for a homeowner to agree to rent-to-own, unless there are personal reasons like doing a favor for a family member or carrying owner financing for monthly income, for example,” said Cude. “When they’re ready to sell, most homeowners want to either rent out their home and continue to build equity as an investment, or they want to be rid of it altogether.”

If the wait and hassle of finding a rent-to-own arrangement is too much, there is little harm in simply trying to qualify for a home loan. By comparing different rates and weighing their options, consumers may find getting a home with a mortgage loan will actually going to save them money and time in the long run. As with all things related to money and financing, the choice is ultimately up to the consumer who has to act in his or her best interests.