Rent to buy homes may also be called rent to own or lease option homes. There are some differences between contracts on each of these that should be noted. Disadvantages and advantages of rent to buy homes or lease option homes need to be duly considered prior to making this type of arrangement with a landlord.
In a rent to buy home scenario, a potential renter makes a deal with a landlord to purchase the house by a set date at the current market value. During the time the renter is paying rent, they also need to be saving for their deposit. In some cases, especially in rent to own or lease option situations, the renter not only has this arrangement with the landlord, with an option to later purchase the property, but pays extra rent which will constitute a portion of the deposit on the house when the house is purchased. Instead of simply having an agreement to buy the house at a set price, the renter is actively contributing towards the purchase of the home through extra payments.
While this scenario might be terrific for some people, it’s not so great for others. First off, the housing market must be taken into account when you’re thinking about rent to buy homes. If you agree on a market price now that turns out later to be higher than the value of the home then, the rent to buy situation may not work out well. If during the time you’ve rented the home, and decide later not to buy it, then you lose any extra funds you’ve given to the landlord. Unless you break your lease, this doesn’t hurt your credit, but it can certainly diminish any savings toward buying a new home.
On the other hand, when the housing market is inflating, rent to buy homes may be a great way of locking in a lower market price. By committing to a lease option or rent to own situation, and by contributing monthly toward your deposit, you are actively saving money toward the purchase of the house. You also may get the house at a much better deal when you actually can afford to buy it, then you would if you simply save money on your own for the later purchase of a home. There is some risk, however. Housing markets can be volatile and are not always predictable.
You should consider, prior to looking at rent to buy homes, your eligibility for purchasing a home within the set date of the option to purchase. You’ll need to consider your earnings, your credit rating, and any upcoming events, like starting a family that might affect future earnings or credit. Most realtors recommend seeing a good mortgage broker before agreeing to a lease option of any kind; since you absolutely must know if you’ll be eligible for the loan you’ll need to take in order to get the home. You should also treat any rent to buy homes as similar to the direct purchase of a home. It is vital to have the home adequately inspected and appraised before a price is agreed upon.
