How Rent-to-Own Affects the Buyer

What About the Buyer?

We read a lot about the positive effects of a lease option or rent-to-own option when it comes to sellers, but, there's another side to the story as well. Buyers are the flip side of the equation and as such, should be as careful in weighing their options as the sellers are. Buyers need to do their homework before negotiating a deal. Sellers are usually more aware of what is going on in the market, so research on the buyers' part is important in order to ensure a solid and fair deal.

Advantages to the Buyer in a Rent-to-Own

First of all, if the buyer in such an agreement has a poor credit record or is unable to come up with the money necessary for a down payment, then the rent-to-own option gives them time to fix the problem and build income while they are renting the house. Provided the agreement allows for it, a renter/buyer can walk away from the deal if they find some serious problems with the house. Sure, they'll lose the option fee (paid up front) and the rent money they paid, but at the end of the day, they'll be ahead of the game. The money they lose will likely be only a fraction of what it would have cost if they bought the house outright and then tried to leave.

The Downside for the Buyer

On the downside of the agreement, the buyer has to pay the upfront option fee which is usually a percentage of the price of the house and is written in the thousands. If the sale goes through, then this money becomes part of the down payment, but it can still be difficult to gather up the kind of money necessary for the option fee - especially if their credit rating is poor. Rent-to-own leasers must pay on time every time. Most rent-to-own agreements void the rent credit if the rent is even one day late. That means that the down payment is reduced by that amount every time the rent is late. Finally, all the repairs that would normally fall to the owner of the home suddenly become the responsibility of the renter/buyer, even during the rental period. The renter/buyer has all of the responsibility of a home owner without the paper to prove it until the agreement period is fulfilled and the option to buy is enacted.

Pluses and Minuses for the Seller

There are, of course, pluses and minuses for the seller as well. Falling home prices don't affect them if they are locked into a three year agreement on a rent-to-own option. Renters who are hoping to purchase the property generally take better care of it than those who are just renting and planning to move again.

If the renter decides against purchasing, then the option fee and all of the rent is money in the bank, but the seller still has the house. This can pose a problem since the rent money usually goes to satisfy the existing mortgage on the house the seller is renting with a purchase option. If the seller can't manage two mortgages or is unable to find another renter, they may be forced into foreclosure.