A lease-to-own agreement, also known as a rent-to-own home purchase or simply lease purchase is a lease that comes with an option to buy the property before the end of an agreed period of time (in many cases tow to three years or less) at an agreed price.
These kind of arrangements have become pretty common in the post- mortgage and real estate crisis market as low and middle-income buyers are having a tougher time qualifying for a mortgage.
As much as lease-to-own contracts can be structured to benefit both the seller and the buyer, it should be taken into account that they can also be designed to substantially favor one party. Buyers especially need to be more prudent before signing these contracts as they usually know less about the markets and can be easily taken advantage of by home sellers.
The following pros and cons of lease to own homes should be investigated thoroughly by homebuyers in order to make informed decisions.
1. Easy to qualify
Unlike in conventional home buying where you’ll need to provide your lender with minimum employment history, debt-to-income ratio, affordability ratios, tax records and minimum credit records, in the lease option the seller lays out the guidelines, making it easy for you to qualify and thus afford property. In most cases only the rental history, the only factors include paying the option fee, monthly lease payment and a scrutiny of the previous rental history.
2. Buyer gets to occupy the home immediately
The buyer can occupy their new home as soon as the option fee and the lease payment are settled. In conventional financing, it can take a couple of weeks or even months to go through the process and occupy the home.
3. Buys buyers time to improve their credit
The buyer has the advantage of living in the home while working on their credit. As a buyer, choose a lease period that matches the time needed to improve your credit before committing to a contract.
If the financing for the property is being provided by the seller, then credit is virtually one less problem to worry about.
4. Save for the down payment
For low and middle-income earners who may not afford the high down payments, rent to own homes let buyers accumulate their savings over time and raise the down payment.
Most contracts let buyers save with Monthly Rental Credits. When the buyer is ready to buy the property, the owner discounts it by the amount saved with the Monthly Rental Credit, offering buyers an equity down payment.
5. No Taxes
Homebuyers are not subject to any special taxes while paying rent, an added advantage that lasts through the lease period.
6. You can still change your mind
Once you pay the option fee, you make a partial commitment to the home. That said, a homebuyer still has the benefit of rightfully changing their mind on the property before making the final purchase.
This prerequisite may come in handy if the buyer realizes the home doesn’t offer the desired conveniences or if an unforeseen financial constraint sets in.
1. Rents could be higher than normal
In many lease to own home contracts, the sellers may set higher-than-normal rent amounts, which may count against the buyer if he/she finally opts against purchasing the home.
2. There is no tax deduction for interest
Unlike in traditional lending where buyers may enjoy a tax deduction on mortgage interest, there is usually no such offer during the lease period of a lease-to-own contract.
This should definitely be a disadvantage to consider before making your decision.
3. Lease can be cancelled
In case of late payment or any other form of contract terms violation, the seller may decide to cancel the lease. This would most likely lead to a loss of the option fee paid at the beginning of the lease period as well.
4. Sales prices are usually high
Sellers in the rent to own a home option often tag their homes with higher sales prices than in the cash sale option as they have to wait longer to receive the whole amount for their property. But since the buying price is negotiable, and, well, the real estate market is currently a buyer’s market, the homebuyer has a strong position when entering negotiations to have the asking price adjusted.
5. Potential Title Encumbrances
When choosing the rent to own option, it’s good to seek the guidance of a title company or attorney to ensure encumbrances such as liens do not come in the way when you’re ready to make the final payment and become the official owner of the home.