According to the U.S. Census Bureau, approximately 63 percent of the almost 127 million housing units in the U.S. are owner-occupied. This is the lowest the homeownership rate has been since 1970.
As more Americans rent, there is increased interest in purchasing options, such as rent-to-own homes. This unique arraignment offers an alternative to a traditional mortgage yet a path to home ownership.
This article explains what this entails and the different advantages it affords. Keep reading to determine if it is right for you.
How Rent-to-Own Works
In a rent-to-own home, the renter signs a lease for a set amount of time before buying it. This "lease purchase" is a contract between the tenant and the property owner that designates a future closing date for the sale of the home, usually one to five years in the future.
When someone enters into a rent-to-own lease, they either pay a nonrefundable deposit (usually between 1 percent and 7 percent of the purchase price) or pay monthly "rent premiums." These are payments made in addition to rent.
These (or the deposit) go into an escrow account and remain there until the end of the lease. The renter then uses these funds as part or all of the down payment for the home.
Rent-to-Own Benefits
The biggest advantage of the rent-to-own process is that it has a built-in saving mechanism for accumulating a down payment. This can benefit first-time home buyers or anyone who has limited savings. It also can be a motivating tool for people who have difficulty putting money aside.
Another plus is that it allows renters to build equity and credit while living in the home. That can be especially advantageous for people with lower credit ratings. Another major benefit of rent-to-own homes is that they remove the stress of house hunting and securing a mortgage.
Disadvantages of Rent-to-Own Homes
There are a few potential downsides to rent-to-own arrangements that tenants should consider. One is that it is a legally binding contract. So, if you decide not to purchase the home, you could risk losing a lot of money.
Likewise, rent-to-own contracts, like mortgages, have little wiggle room. If you fall behind on payments, you risk losing the money you have invested (as well as the house).
Next, renters are locked into the price they agree to pay for the house, regardless of what happens during the "rental" period. If the value of the house diminishes, you could end up paying more for it than what it is worth. However, the reverse is also true: if the value appreciates then you could end up getting a fantastic deal.
Finally, rent-to-own is not merely a divergence of funds that would otherwise go to rent. While it certainly can save money, you can expect rental premiums to be higher than what you would otherwise pay in rent alone.
Learn More About Rent-to-Own Opportunities
Now that you understand how the process works, you can determine if rent-to-own homes are right for you.
PMI Commonwealth is a comprehensive real estate asset management company serving Blacksburg, Roanoke, and the surrounding areas. We offer a variety of commercial and residential services, including marketing, tenant screening, rent collection, maintenance, and more.
Contact us to discuss home ownership strategies.
