Rent to Own FAQ Sheet

Table of Contents

• About Us
• What is a Rent to Own Agreement?
• Which Types of Rent-to-Own Contracts Are Available?
• Reasons to Consider a Rent-to-Own Option
• How Does the Rent-to-Own Process Work?
• Federal and State Rent-to-Own Legislation
• Where to find Rent-to-Own Homes
• Need More Help?
• View of Download Our Free Guide

About Us

We are not affiliated with the government in any way. We are a private company that engaged writers to research rent to own agreements and compiled a guide and the following answers to frequently asked questions. Our goal is to help you get the benefits that you need by providing useful information on the process.  We are not providing legal or financial advice. If you need such advice please contact an attorney or a financial advisor.

What is a Rent to Own Agreement?

Rent-to-own contracts offer a way for prospective homebuyers to find and ultimately purchase a home. While traditional mortgages and home loans let borrowers purchase a home right away, rent-to-own agreements include a rental period of the house before purchase.

Rent-to-own agreements first arose in the 1960s and offer future homeowners a unique way to “try before you buy.” Prospective homeowners have the opportunity to live in their dream home before deciding on the purchase. Rent-to-own contracts can also benefit those who want to purchase a home but may not have the credit score, debt-to-income ratio, or down payment necessary to be eligible for a traditional mortgage. These contracts give these borrowers more time to build their credit and make payments towards the home’s purchase price while renting.

Which Types of Rent-to-Own Contracts Are Available?

Not all rent-to-own contracts are the same, but most arrangements are lease purchase or lease option contracts. The key difference between these two rent-to-own agreements is whether or not the seller and prospective buyer are legally obligated to go through with the home’s sale at the end of the leasing period.

With a lease purchase, both the seller and renter are contractually obligated to go through with the home’s sale following the lease period. This can place buyers in a stronger negotiating position, especially if others are interested in renting the property. Buyers may be able to negotiate on the purchase price and option fees since the purchase is guaranteed.

The downside of lease purchase options is the lack of flexibility for the prospective buyer. Buyers do not have the option to decline the home’s purchase after the leasing period, even if there are significant problems with the house, the home’s value falls, or the buyer finds difficulty in qualifying for a mortgage.

A lease option rent-to-own contract provides the prospective buyer with the flexibility that a lease purchase lacks. At the end of the leasing period, buyers can go through with the purchase of the home or not. This provides buyers with a safety net in the event of major problems with the house, problematic neighbors, failing to qualify for a mortgage, or unexpected changes or opportunities.

Suppose a buyer does choose to purchase the home at the end of the rental period. In that case, sellers are obligated to sell the house at the price negotiated upon before the rental period, even if the home’s value has risen since. However, if buyers choose not to purchase the home, their option fee, and accumulated premium payments towards the home’s purchase price will be forfeited.

Reasons to Consider Rent-to-Own Options

Rent-to-own contracts are very different from the traditional processes of purchasing a home. Therefore, these agreements have unique sets of pros and cons for both buyers and sellers.

As a buyer, rent-to-own agreements offer benefits such as:

• The ability to move into a home you love right away
• Additional time to improve your credit and debt to income ratio to qualify for a better mortgage
• Locking in the current market value of the home
• A portion of rental costs goes towards the price of the home each month
• Test out a home before you buy

However, buyers may experience drawbacks, such as:

• Pricy up-front option fees
• If your rent-to-own agreement were ever terminated, you would lose your option fee and other non-refundable costs
• You may not qualify for a mortgage at the end of the rental period
• Potentially locked into a previous market value of the home if the value has since fallen
• Rent will likely be higher than standard rentals
• Additional consequences for late payments, such as losing the ability to purchase the property

As a seller, rent-to-own contracts offer benefits such as:

• Locking in the current market value of the home, even if the home’s value begins to fall
• Renters are more likely to treat their living space better if they intend to purchase the home
• If a renter does back out of the contract, you still keep the renter’s option fee and rent premiums
• You will be contractually obligated to sell the home to the seller, even if you change your mind about the sale of the house or another offer comes along

However, sellers may experience drawbacks, such as:

• It may take longer to sell the home
• If a renter declines the purchase of the home, you have to find another renter or buyer for the home
• Locked in at a previous market value, even if the value of the home has risen

Rent-to-own contracts aren’t for everyone, but they offer a unique way of purchasing a home for many, including those who might not otherwise qualify for a home’s purchase right away.

How Does the Rent-to-Own Process Work?

If you are interested in a rent-to-own contract, you must first find a home that you love with a seller who is willing to do a rent-to-own agreement.

Before you begin negotiating your contract, it is essential to complete specific due diligence tasks to help you in your negotiations and help you decide whether or not you want to purchase the home. These tasks include:

• Home Inspection: Home inspections ensure that a property is safe, structurally sound, and in good repair. Inspections are a critical part of purchasing any home, regardless of whether or not you rent-to-own, and should not be overlooked here.
• Appraisal: Appraisals inform you of the value of the home. The home’s value is influenced by many factors, including location, design, additions, features, size, and amenities. Knowing the home’s value will help you in your negotiations and ensure that the seller is not asking for more than the home is worth.
• Public Records Search: Searching public records could uncover any foreseeable problems you might have with the property or the owner. Records to keep an eye out for include previous appraisals, shared property titles, liens against the property, an owner’s previous foreclosures, or any unpaid property taxes.

Next, you will need to negotiate the rent-to-own contract terms and costs. You will need to negotiate the:

• Selling Price of the Home: Doing your research and having an appraisal and home inspection done on the home will provide you with the tools and information needed to negotiate the house’s price. The purchase price that you and the seller decide on will be locked in, regardless of whether or not the home’s value rises or falls. Depending on the type of rent-to-own contract you have, you may or may not have the option of walking away after the rental period.
• Rent and Premium Percentage: During the rental period, a percentage of your monthly rental amount will go towards the purchase price. That percentage is generally between 20 and 50 percent of the payment. The higher this percentage, the less you will need to borrow for the home’s purchase at the end of your rental period. However, it is also important to consider the rental’s overall cost and ensure that you can afford it. Rent-to-own contracts may include stipulations about late payments, such as forfeiting the right to purchase the home or penalties towards the premium percentage during months where rental payments were late.
• Option Fee: Option fees are similar to a down payment. These fees are paid upfront and are generally non-refundable. The owner may charge a higher option fee if they doubt your commitment to purchasing the home.

In addition to negotiating costs, it is important to discuss and negotiate other responsibilities for the home during the rental period, including property taxes, maintenance costs, and repairs.

Maintenance responsibilities are usually divided between the owner and the prospective buyer. However, it is important to discuss maintenance responsibilities, large and small, upfront to avoid any surprises down the road. It’s essential to make sure anything you and the owner decide upon is included in the rent-to-own agreement.

Property taxes are annual taxes that must be paid for a property. Your rent-to-own contract should include whose responsibility it is to pay these taxes. This may also be another negotiation point that you can use when reviewing the rent-to-own contract.

In a lease option contract, you and the seller will agree on a set amount of time that you will rent the property before you choose whether or not to purchase the home. In a lease purchase contract, you and the seller will negotiate the rental period before buying the house.

During your rental period, it can help improve your credit and other factors that will influence your ability to qualify for a mortgage. Doing so will help make sure that you are eligible and potentially help you get better loan rates.

After the rental period, you will need to apply for a mortgage, unless you can pay for the remainder of the purchase price outright. The closing stage of a rent-to-own contract is similar to that of traditional purchases. Your lender may require another appraisal and home inspection, the cost of which you can also negotiate with the home’s seller. These fees are generally considered to be closing costs, along with the home’s title search fee, title insurance HOA fees and assessments, and various lender fees. In traditional home sales, the buyer generally pays nearly all of these costs. However, your seller may be willing to negotiate closing costs with you for your rent-to-own contract.

Federal and State Rent-to-Own Legislation

There are currently no federal laws specifically regulating the rent-to-own industry. However, that may change in the near future as there are two proposed laws waiting approval by Congress. These laws are the Rent to Own Protection Act and the Consumer Rental Purchase Agreement Act. Both laws would seek to protect buyers and provide additional regulation to this ever-growing industry.

You can learn more about the Rent to Own Protection Act here and the Consumer Rental Purchase Agreement Act here.

While there are no federal laws currently regulating the rent-to-own industry, certain state laws impose guidelines, restrictions, and requirements on rent-to-own contracts. However, it is worth knowing that New Jersey, North Carolina, and Wisconsin do not currently have any state legislation regulating rent-to-own agreements.

*Justia is not a government website and therefore may not be up to date. However, Justia does provide free information about rent-to-own legislation.

Where to Find Rent-to-Own Homes

Only about five percent of homes are available for rent-to-own contracts. This can make it difficult for prospective buyers to find a home that they love. However, there are several agencies that may offer rent-to-own properties or can help you find them:

• The Department of Housing and Urban Development (HUD): The HUD takes ownership of homes that had a government-guaranteed mortgage and are being foreclosed upon. If the HUD struggles to sell a home outright, it will sometimes provide rent-to-own contracts to prospective buyers. You can view an example of a lease-option contract with the HUD here.
• Real Estate Agents: Local real estate agents can point you in the right direction towards rent-to-own homes in communities that you’d like to live in. Sellers working with real estate agencies may offer rent-to-own contracts on homes that have been listed for quite some time, but have not yet sold. Factors such as these may also help you when negotiating costs with the seller.
• Online Searches: There are several websites where sellers can advertise their rent-to-own properties. However, it is important to always research a property and owner thoroughly to avoid scams.

Need More Help?

There are several agencies that you can contact to learn more about rent-to-own contracts and related fees, including:

• Housing counselors approved by the Department of Housing and Urban Development. Search online for a counseling agency in your area here or call 1 (800) 569-4287.
• The Association of Progressive Rental Organizations (APRO) that actively defends the rent-to-own industries and provides education or lawmakers about the benefits of these agreements. Learn more here.
• Local real estate agencies may be able to provide guidance on rent-to-own contracts as well as information regarding legislation and regulations within your state.

View or Download Our Free Guide

While we are not affiliated with the government in any way, our private company engaged writers to research rent-to-own agreements and compiled a guide that we believe is simple to use and easy to understand. Our goal is to help you by providing detailed information on the process.

Our free Rent-to-Own Guide is filled with helpful information about how rent-to-own agreements work and how to generally navigate the process. You can view or download our free guide here.