I get this question all the time and have never really had a discussion about it, until today.
Let me start by saying that i’m not a huge fan.
I want to get that out of the way so that you understand that this article is only my opinion, and I am going to focus on the reasons why I’m not a fan of rent to own or lease to own homes.
In a nutshell, when you sign a lease or rental agreement, you are committing to pay higher rents on the home for a period of years, at which point you have an option to buy the home at the end of the lease.
The attraction to a home buyer for this arrangement is that the excessive portion of your rent is applied toward the down payment of the home, it’s sort of a forced savings plan.
1. This scenario is “sold” to folks that cannot qualify for home loan financing right now. Paying rent to someone under the pretense that you will have the option to buy this home in a few years will DOES NOT help you to qualify for home loan financing. To me, this is a predatory tactic that preys on people’s desire to own a home when they can’t afford it at this time.
2. Lender guidelines are going to be extremely critical of a lease to own or rent to own down payment arrangement. The Lender may not accept the down payment source from the seller unless it meets strict verification guidelines.
3. In order for you to “save” money to be applied toward the down payment, you are required to pay higher than market rents – the excess is then applied toward your down payment savings account – make sense?
4. An “option” means that you pay a premium for the right to buy the home at a future date at terms that are negotiated at the time you sign the lease. This is a detailed legal agreement that requires that you fully understand the future ramifications of such an agreement. After the honey moon period ends, and you are now in a 2 to 3 year lease at above market rents, what if you don’t like the neighborhood? What if you don’t like the house?
5. Finally, what if the seller loses the home? This is something that I’ve actually seen. The “seller” is upside down on the home, offers a lease to own, can’t keep up with the payments then loses the home to short sale or foreclosure.
Ok, it was a real struggle to keep this list to only 5 reason why I don’t like rent to own or lease to own homes, I could rant for hours about this topic.
To wrap this up, here are my final thoughts.
If you are not in a position to buy a home now, do not enter into a higher burden rental situation as a desperation move with hopes of being able to buy a home in the future.
This is a dangerous thought process that I have seen end most often in the owner of the home laughing all the way to the bank because you’re paying higher rent than you should have because you have “dreams” of owning in the future.
Forget all that. Save your money on your own. Fix your credit. When you are able to qualify for a home loan, THEN, and only THEN do you start looking for your dream home.
There are no short cuts.
It goes against logic that by paying more for your rent that it will get you closer to fixing your credit or help you to save more money for a down payment.
I invite anyone with a contradictory argument why lease to own is a good idea to challenge my beliefs here. I’m not saying I’m right about this, I’m just opinionated 🙂