Cons of Rent-to-Own Programs
As with most things financial, there are some negative aspects of rent-to-own real estate programs, to go along with the positives. These types of deals aren’t perfect for every person or every situation. There are a few big drawbacks that might make you think twice about agreeing to a rent to own real estate deal. Here are the main cons you’ll encounter.
Most rent-to-own agreements require a one-time, non-refundable fee. It’s usually called the option fee (or sometimes the option money or option consideration). Paying this fee is the thing that provides you with the option to buy the house when the lease term ends. The option fee is often negotiable. However, it typically ranges between 1% and 5% of a home’s purchase price.
If you choose to walk away from the purchase option at the end of the lease, you won’t have this fee refunded. As you can see, opting for a rent to own agreement isn’t for anyone still on the fence about buying a house. If you are forced to back out of the buying option, the higher-than-market rent price and these options fees will just cost you more money in the long run.
We already talked a bit about purchase price. It can actually be both a pro and a con. On one hand, you can “lock in” the price of the house years in advance. That might end up being a big win, if the value of the house increases by a lot in that time. It’s also nice to know exactly how much you need to budget for when it comes to applying for mortgage approval.
On the other hand, sometimes the purchase price is not pre-determined. In many rent to own deals, the purchase price is to be determined by market value at the end of the lease term. That could be a major problem if housing prices explode up in your market. You may be planning, for example, to buy a house for $500,000 in three years. But if the market value of that house is actually $750,000 by the end of the lease, you could be priced out. Too bad you paid higher rent for years and non-refundable fees, only to have to walk away from the deal.
One of the advantages of renting (as opposed to buying) a home is being able to rely on your landlord for maintenance. They will replace dead appliances, fix the furnace if needed, and provide general handyman work replacing faulty light fixtures. Since they still own the property, they cover these costs.
In a rent to own deal, you might end up being responsible for these costs instead. This can also include things like lawncare or snow removal. In short, rent to own deals can sometimes feel like all the responsibilities and costs of owning a house, without actually owning it. You may still need to take out a renters insurance policy, even though you’re paying for things that the owner or landlord would normally cover. Make sure you read the fine print of any rent to own contract carefully. In fact, have a lawyer read it over too. These home maintenance responsibilities (and costs) are sometimes negotiable, so feel free to push back a bit.