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Pitfalls of Rent to Own Properties

By Mary Lamphere

Many renters are turning to rent to own or lease option agreements in an effort to get their foot in the door and get started on the road to owning a home. For those who don't have enough money saved up to purchase a home but aren't really happy with the idea of renting any longer, rent to own properties can provide the step up in the right direction toward home ownership. Unfortunately, there are many pitfalls associated with renting to own and while this can be beneficial to some, the majority of renters who get themselves into such an option are not fully aware of the things that could go wrong.

In theory, rent to own sounds like a great deal for both the seller and the renter or buyer. The seller will receive cash for the rent due as well as additional money toward down payment and the buyer will immediately move into the home but will be provided with time to take steps to improve the credit score and qualify for a mortgage. Unfortunately, small mistakes such as a missed payment can lead to contract violation in which the seller has the right to terminate the agreement leaving the potential buyer without a place to live, without the equity that has been paid in and starting back at point A.

Rent to Own Pitfalls for Buyers

The buyer should be on the lookout for anything that could possibly go wrong with a rent to own property. There are many dangers for the buyer including:

  • The seller could lose the property as a result of non-payment, foreclosure, tax lien, divorce or being sued. If the seller loses the property, the buyer loses the ability to purchase at the end of the lease agreement. The buyer will also lose any equity that is put into the home.
  • A missed payment could result in a voided contract in which case the buyer loses the option of purchasing the home and also loses any additional money that was paid toward the purchase of the home
  • Because there is no home inspection or property appraisal required in a rent to own contract the buyer could agree to a purchase price that is much higher than the home is worth and will later have trouble securing a loan if the property is not valued so high.
  • Although illegal, the seller could decide not to sell the property to you at the end of the term. This could happen as a result of an increase in property value which makes the seller feel like they could get more money from a different buyer than what was originally agreed upon. Without a lawyer, you will have very little recourse and could lose the rent that you have paid in
  • The home could depreciate and no longer be worth what you originally agreed upon.
  • The market could decline and the home may be priced to high when the buyer is ready to secure a mortgage.
  • Cost of the rent to own property could be higher than that of a standard rental which would allow for more savings to make an outright home purchase.

There are definitely pros and cons associated with renting to own. For the right buyer who is financially secure, has already talked with a mortgage broker about his or her ability to qualify for a loan and knows how much home can be afforded, rent to own can provide a stepping stone in the right direction but only if the seller is serious, reliable and honest. Without an honest seller, and even sometimes with an honest seller, rent to own could prove to be a disaster.

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