The Perks and Perils of Rent-to-Own
If someone told you there was a way to buy something expensive by slowly easing your way into it, not committing to fully purchasing it for a few months or years so you have time to make sure you’re completely content with it, would you say that sounds like a great deal?
That’s the appeal of the “rent-to-own” process.
The rent-to-own (or rent-to-buy) structure exists for many types of products and properties, ranging from home appliances to jewelry to furniture, and is commonly used by retailers such as Aaron’s and Rent-A-Center.
Beyond all of these, however, the biggest things consumers rent-to-buy are homes.
Some may already be very familiar with the rent-to-own concept, while others may have never heard of it. Is there a reason why it’s so popular in some circles and not even an option on the (fully-purchased) table for others?
How (and Why) It Works
Besides the appeal of giving buyers a chance to back out if they see fit, renting-to-own also offers an avenue for purchasing something buyers cannot initially acquire the traditional way.
This can be due to a lack of funds or because of a poor credit score disqualifying them from a loan or mortgage. Renting-to-own either buys consumers time to rebuild their credit and gather their assets or circumvents the need for a loan.
For things such as furniture and electronics, renting-to-own is rather straightforward.
The buyer and seller agree to the terms of the deal, including the rental rate and the final cost of the product. The buyer then gets to use the item just like a rental. At the end of every term, the buyer’s presented with the choice to continue with the arrangement or to stop paying and end the deal.
The buyer also has the third option to pay the rest of the money owed at any time and buy the item outright.
Property – Preliminaries
When it comes to renting-to-buy a home, things can get murkier, and the seller has much more leverage over the terms of the deal.
Typically, in a rent-to-buy-home deal, the seller sets the full price of the home and the rental rate, but also the term of the rental. (Note: in some negotiations, both parties agree to wait until the time of purchase to set the price – this will be important later.) The buyer signs the contract, and for a while, it’s just like they’re typical tenants.
But there’s a second contract to be signed: the lease agreement. This is where the deal can go one of two ways.
If it’s a lease option, then the buyer will be given the right to buy the house at the end of the rental term before any other potential buyers can make an offer, but the buyer can still decline if he wishes.
If it’s a lease purchase, the buyer is required to buy the house when the rent period ends and cannot back out under penalty of law.
Therefore, it’s important to specify which of the two you’re presented with if you’re positioned to sign such a contract.
Property – Practice
Throughout the rental period, rent will actually be a bit higher than usual. This is because the landlord is taking this extra portion and putting it toward the price of the property.
If the tenant decides to purchase the home, then this fraction is already paid off. But if the tenant decides to not buy, he forfeits the money already spent.
There are even more small details that make renting-to-buy a home more complicated, such as how many of the home’s repairs are the buyer’s responsibility.
Still, it’s an appealing idea to be able to bide your time so you can stabilize your finances and ruminate on a big decision.
So, why doesn’t everybody rent-to-own, for homes or otherwise? Is the complicated nature too much for some people?
High Reward, High Risk
No matter the purchase, many warn against renting-to-own because it’s almost invariably the more expensive option in the long run.
Many little payments eventually add up to more than what the purchase is worth. Yet as long as there are people who need things they cannot yet afford to pay in full, renting-to-own will be an option people pursue.
The risks are especially perilous when arranging a rent-to-buy process on a home.
Betting Against the House
For one thing, regardless of whether buyers have the option to defer agreeing on the final price until later, there’s a chance they’ll lose either way.
If they wait, the value of the home could skyrocket, and they’ll have to pay more. But if they lock in a price upfront, the home’s value could fall, and then the buyers would be stuck overpaying.
If a buyer isn’t an expert at predicting housing market trends, this could prove to be a dilemma with no clear path. It’s almost a good thing many sellers won’t give buyers a choice over whether the price will be determined later rather than sooner.
Between the possibility of being stuck grossly overpaying and incurring sunk costs even if you back out, it may seem the contracts in a rent-to-own deal are nothing but danger.
But the question must be asked: could you wind up being your own worst enemy?
The entire point of renting-to-own is to buy time for the buyers to regather their finances, but what happens when they can’t get that straightened out in time?
At best, they have to forfeit their chance to buy the property. At worst, if they’ve signed a contract committing to buy, they may be on the hook for some severe infractions.
By the way, take a moment and look at your favorite real estate website. You’ll see a section for buying and a section for renting, but you probably won’t see a portal for renting-to-buy.
While there are some separate websites for this kind of thing, it’s mostly still something arranged by personally popping the question to the landlord.
Speaking of landlords, can you be certain the seller isn’t shady?
The Shifty Used-House Salesman
Sometimes rent-to-own deals fall apart because the landlord doesn’t know how to handle his own money, and the tenant never gets the chance to buy the house because it gets foreclosed first.
Other landlords may hide severe problems with the home and leave the new owners to deal with it.
Still other rent-to-buy opportunities are simply scams.
Someone pretends to be the owner of a house and puts it up for rent, takes an “upfront security deposit,” which shouldn’t be a part of a legitimate arrangement, and is never seen from again.
Alternatively, the sellers may really be the real owners, but the home is already being foreclosed upon and they know it.
To watch out for scams like these, get all the information you can:
- Make sure the seller is the real owner and has good credentials.
- Don’t provide an upfront deposit.
- Make sure the asking price isn’t suspiciously high nor enticingly low, because after all, a small haul is better than no haul.
- Whatever you do, make sure you get a chance to personally inspect the home inside and out before you hand over any cash.
Is It Worth the Risk?
Renting-to-own things like household objects via a reputable retailer is a relatively safe route if you have a feasible financial plan to follow.
It should be repeated, though, it will almost always cost more in the end than to buy the same thing at full MSRP. But of course, some people don’t have all that money altogether at once.
Renting-to-buy a home is much dicier, to say the least. There’s a lot that can go wrong, but if you have your wits about you, there’s no reason it can’t go right.
Again, it will cost more than paying the asking price up front, since only a small portion of your rent is going toward the price of the house. But again, it’s the only option some people have.
Renting-to-own is not the ideal way to purchase something, but it’s another option for those who can use it. It’s gone wrong for some and gone swimmingly for others. As with many things in life, this opportunity is what you make of it.