Is Rent to Own a Wise Investment?
The concept of rent to own has gained popularity in the real estate market, especially for first-time buyers or those who cannot afford to buy a property outright. However, the merits of this investing strategy are often debated. In this article, we will explore the pros and cons, common pitfalls, and what potential buyers should consider before entering into a rent to own agreement.
Understanding Rent to Own
Rent to own (or lease-to-own) is a method that combines leasing and purchasing a property. In this arrangement, monthly payments made by the tenant/tenant-buyer are split into rent and buyer interest. The buyer can convert their lease into ownership by purchasing the home before the end of the lease term.
The Case for Rent to Own
For some, rent to own can be a viable option. A real-life example is that of a tenant who was paying an extra $1,000 per month. Upon moving out, the excess amount (with interest) amounted to around $60,000. This method provides a way to save money and potentially purchase a home without a large upfront payment.
The Case Against Rent to Own
However, most rent to own deals come with significant risks. Often, when a house won't sell for a desired price, a naive buyer is lured by the idea of crediting lease payments toward ownership. These contracts are usually overpriced, and the seller benefits from a tenant who is eager to own the house and maintains it well. Most often, when the time comes to buy, few buyers can afford it due to poor credit or financial instability.
Common Pitfalls of Rent to Own
1. Upfront Costs: The upfront option fee and extra monthly payment will be deducted from the purchase price. This can leave the buyer with a significant gap to cover a down payment.
2. Property Liens: If there are pre-existing liens on the property, they must be cleared before the buyer can purchase.
3. Short Lease Terms: The option period is often too short, leaving insufficient time for buyer’s credit to improve or income to increase, making mortgage qualifications challenging.
4. Property Value Concerns: If the property's purchase price is too high or the market has a downturn, the house might not appraise at a value that allows a loan.
Stay Cautioned
The deal can be particularly risky if the person offering the lease option doesn't truly own the property. This can lead to a breach of contract and financial loss.
Additionally, studies show that many renters are unable or unwilling to purchase the house even when the contract has expired. Meanwhile, the seller benefits from high monthly rents and a substantial "deposit" down payment.
Conclusion
While the hype of rent to own as an investment strategy may seem enticing, it is important to thoroughly research and consider the pitfalls. Before entering such a deal, potential buyers should consult a real estate professional or a certified public accountant (CPA) to ensure they fully understand the terms and potential financial implications. The wise decision would be to proceed with caution and fully explore all available options in the current housing market.