The Basics of the Two Types of Rent-to-Own Agreements

Are you tired of paying rent every month knowing it is not amounting to anything? Amid the current housing and economic crises, many people have been looking for different options. As the prices for necessities continue to rise, many have begun to take a closer look at their finances and learn how to stretch their dollar further. A rent-to-own agreement could be the answer for those who are having trouble saving a sufficient down payment and obtaining a traditional mortgage.

What Are the Basics?

There are two different kinds of rent-to-own (RTO) agreements, Lease-Option and Lease-Purchase. Each comes with its own pros and cons:

Lease-Option

A Lease-Option, or a “lease with the option of purchasing,” is exactly what it sounds like. This gives a renter the choice to purchase the rented property during or at the end of the rental period. Typically, a lease-option agreement lasts between two and three years, but can be any amount of time agreed upon by both parties. If for some reason, you don’t like the house, neighborhood, commute, etc. you have the option of walking away when your rental term is over. (1)

Pros:

You are not bound to purchasing the home if you do not want to at the end of your rental period.
Even if home values go up, you lock in today’s price to purchase later.
Rent payments go towards your down payment for the home.
If the seller decides to report to a credit bureau, you could see an increased credit score, so long as you make your payments on time (this can help in the obtainment of a mortgage).

Cons:

If you decide not to complete the purchase, you lose out on all the money you paid the seller for your down payment.
Monthly “rent” will be higher than traditional rent payments, due to fees associated with building your down payment.
You may be responsible for repairs and maintenance that would typically be a landlord’s responsibility.
Just as you have the option to walk away from the agreement, so does the seller.

Lease-Purchase

A Lease-Purchase agreement is also just how it sounds. This type of agreement is entered into under the assumption the renter will be purchasing the property at the end of the rental term. Offering less flexibility, but more stability is often why a lease-purchase agreement is the more favorable option of the two. Just like the lease-option agreement, the terms can last two to three years, depending on what is agreed upon by both parties. If you are in love with every aspect of the home but are just having trouble obtaining a mortgage or down payment at the time, this could be the perfect option for you. (2)

Pros:

Even if home values go up, you lock in today’s price to purchase later.
Rent payments go towards your down payment for the home.
You do not have to pack up and move again
If the seller decides to report to a credit bureau, you could see an increased credit score, so long as you make your payments on time (this can help in the obtainment of a mortgage).
Any work or maintenance you do to the home during your tenancy, can be done how you want it; it is going to be your house!

Cons:

You are obligated to complete the purchase of the home.
Monthly “rent” will be higher than traditional rent payments due to fees associated with building your down payment.
You may be responsible for repairs and maintenance that would typically be a landlord’s responsibility.

As you could probably tell, there is not too much of a difference between the two types of rent-to-own agreements. The difference really comes down to the amount of flexibility you desire. Both agreements should be entered into with the intent of one day becoming the owner of the home. Though rent-to-own options have been broken down simply here, they can become very complex and dicey, so it is very important to have the right professionals on your side. Make sure you’re working with a broker and a lawyer that have plenty of experience with RTO agreements so you will be up to speed on your specific situation.

Home ownership could be closer than you think, so you should consider rent-to-own options today!