How to rent to own

At we give you clear explanations about the pros and cons of the rent to own home approach. Many people wonder if it is the right decision for them – we're here to assist you in making the best choice. Let's start with the advantages.

The advantages

Advantage 1: Improve your credit rating

Although interest rates and home prices are historically low in many parts of the country, credit access is not easier for anyone who has a bad to medium credit rating. Hence the two to five year rent to buy lease agreements provide the perfect opportunity for people to build equity and restore their credit rating with a structured savings routine.

Advantage 2: Repayment stress reduced

Monthly mortgage repayments are a significant commitment. When one considers the state of the global economy and the American job market, the commitment may seem even more daunting. If the main household earner loses his/her job, the repayments and fees associated with home ownership may prove too much. A rent to own house approach greatly reduces the full commitment – and stress – of a mortgage.

Advantage 3: Protect your credit rating

Consider the following nightmare scenario: you're 18 months into a mortgage, lose your job, home prices decrease and the banks tighten their credit policies. The bills increase and you search for a refinance, but you're unsuccessful. This scenario has forced thousands of traditional mortgage holders into foreclosure, while also damaging their credit rating. The rent to own lease, however, means the renter has the ability to simply terminate the contract at the end of the agreed term, which is usually three to five years.

Advantage 4: No large deposit, down payment or lump sum required

Aspiring homeowners who just can't obtain a loan might consider rent to buy homes the perfect solution since they do not need the traditional loan approval benchmarks or deposits, especially considering the fact that many banks now require a down payment of up to 25% of the purchase price. Additionally, under a rent to buy agreement, a potential homeowner can build a deposit quite quickly while avoiding the costly mortgage insurance.

Advantage 5: Avoid property price shocks

A rent to own lease allows aspiring homeowners to avoid drastic home value drops. The only scenario to consider is that if you have paid any extra rental fees you will not get them back once the contract is terminated.

Advantage 6: Get to know your neighbourhood

Trying before buying is always better, right? Although the vast majority of homeowners do their research on suburbs and streets, sometimes you only discover things once you've moved in. The vast majority of rent to own home contracts are written to expire in 12 to 36 months, giving you plenty of time to discover all the great – and potentially terrible – aspects of your neighbourhood.

Advantage 7: Find a buyer more quickly

An often overlooked aspect of the rent to own approach is the vendor's point of view: most leases are from people who have bought new houses, but can't sell their old ones fast enough. For example, an average rent to own lease agreement for a $220,000 house will see a buyer put down a $3000 deposit and pay $1000 in market rent rates a month, plus a $450 a month premium that goes towards the sales price. This greatly assists the vendor in terms of monthly payments.


Disadvantage 1: Hidden fees and lost opportunity cost

Read the fine print of your contract and make sure you get the best legal advice possible. For example, most rent to own house arrangements charge an “option to buy” fee, which can be up to $7000 or more. Also be aware that any capital gains on a property cannot be claimed if you choose not to buy – a painful scenario if you've been paying the higher rent premium for three to four years. Also be aware that if you choose not to buy, you will lose your rent premium payments and initial deposit.

Disadvantage 2: Property market rebounds

The number of property transactions has increased in the past quarter, which means desperate sellers now have to make fewer concessions. This means some may be less willing to enter into a rent to buy agreement as they receive the full amount of their home at a much later time. However, most analysts agree the bottom of the real estate market is yet to be reached, meaning any investor should closely examine the individual area they are interested in.

Disadvantage 3: Disguising bad budgeting

Don't think entering a rent to buy home lease will change your spending habits. If you cannot control your spending and budgeting, you probably shouldn't be making any large financial commitment. Ensure your current and future commitments and expenditures will be able to sustain a mortgage in three to four years when you choose to buy the property.

Disadvantage 4: Mortgage and interest rates

Mortgage rates are at the lowest rate since the early 1950s. This is good for traditional mortgage holders and those who are on a rent to buy agreement with a buy option in the one to two year period – they can lock in a low fixed rate. For those who are considering a “buy” option in the three to five year period, rates may jump to the point that servicing a mortgage is too expensive.

Disadvantage 5: Beware the scammers

As with any financial transaction, be aware of the shady operator. There are a couple known scams in the market. The first is the foreclose prevention scam, where fraudulent operators take home titles that they don't legally own and enter into rent to own lease agreements with naïve renters. These scammers simply take any down payment and extra rent and disappear. Another similar scam occurs with genuine owners who enter into a rent to own agreement while going through bank foreclosures: the unlucky renter will find that even though they paid months in premium rent payments, the bank could choose to repossess the home from the original owner as the title does not transfer to the renter's name until the new mortgage is signed. The initial deposit and rent premiums will be unrecoverable.

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