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There are a ton of benefits associated with renting to own. You can buy a house without qualifying for a mortgage: no down payment, no credit score. The only thing that matters is your ability to pay rent and repair the home.
It sounds too good to be true, so what are the downsides of renting to own? What should you watch out for when you’re setting up a contract?
You’ve probably heard some horror stories about people losing money on rent to own. Still, likely, they didn’t clear up some common misconceptions regarding the agreement.
This article will give you the biggest downside of rent-to-own contracts.
You Might Forfeit All of Your Extra Rent Payments
Let’s say house rents typically out for $1200/month. You’ll probably not be able to get a rent-to-own contract on that house for $1200/month because the landlord has no extra incentive. If he’s not getting any extra money, why go through the trouble setting up a rent-to-own contract? Why not just keep renting it? Instead, the house is going to rent for $1700/month (maybe less, maybe more) because you get the option of purchasing the home at the end of that RTO period.
But the problem is that some contracts don’t count those extra rent payments toward the down payment if (or when) you decide to buy the home. If you’re unfamiliar with real estate, that might have sounded like gibberish. In practice, using our example means that those extra $500/month payments go into your landlord’s pocket. Typically, those additional payments would count toward your home purchase, so you would start with $6k ($500 multiplied by 12 months). Some contracts don’t work like that.
Furthermore, if you decide not to purchase the home, you will probably not get that money back. You might be able to negotiate for a fraction of those extra payments, but if it’s not in the contract, it’s not in the contract. There’s nothing anyone can do to help.
So, when setting up the contract, ensure you understand what you’re getting into. Actually, read the agreement for what it says. If possible, get verbal confirmation from the other party, as well. Depending on state law, this verbal confirmation can be legally binding and digitally recorded as long as one party agrees.
You’re Legally Liable for Any Repairs
When you were renting, you weren’t on the hook for repairs.
With a rent-to-own contract, the tables have turned. It’s no longer your landlord’s responsibility to patch up your siding when there’s a storm or repaint the interior. That responsibility falls on you. As soon as you sign an RTO (rent to own) contract, you will likely be treated as the house owner -- at least in terms of maintenance.
Depending on your rental period, this could be emotionally and financially draining. If there are costly repairs, you no longer get to ask your landlord to fix them, even if he’s still legally the property owner. Suppose you decide you don’t want to buy the house after you make those repairs. In that case, you will not be financially compensated, either.
Your Landlord Might Go Into Foreclosure While You’re Renting
The third problem is that you don’t fully understand your landlord’s financial position. Since you don’t legally own the house, you have no claim on the deed. You’re still just a tenant, and the landlord could make a severe financial misstep that results in both the loss of your extra payments and your eventual eviction.
For example, let’s say your landlord stopped paying the mortgage. Also, he blew them at the bar instead of saving you the extra $500/month payments. The bank keeps sending him letter after letter: a notice of default, a notice of public auction, and a notice of eviction. He doesn’t tell you about any of it.
While you’ve been dutifully making those extra payments, fulfilling your contractual obligations, and confident that you will own your own home soon, your landlord is single-handedly souring the whole deal with his selfishness and irresponsibility.
If the bank forecloses upon the home and sells it at an auction, it doesn’t really matter that you paid your landlord extra money for an RTO contract. You might be able to take him to court, but he’ll probably declare bankruptcy regardless.
Not only will you be out of those extra payments, but you won’t have a place to live.
The lesson: Be careful about who you go into business with.
Conclusion: What is the Downside of Renting To Own?
After reading this article, you might be convinced that renting to own is the worst imaginable. No one should ever do it because there’s so much uncertainty and risk.
The reality is that if you set up a suitable rent-to-own contract with the right landlord, it can be a mutually beneficial transaction that saves everyone a lot of money. Focusing only on what could go wrong makes RTO seem riskier than it really is. Despite lending restrictions, keep in mind that tens of thousands of people have successfully set up RTO contracts and are now homeowners. It’s worked for them, so you can make it work.
With that said, avoid these common pitfalls. Make sure you don’t forfeit your extra rent payments, know that you’re on the hook for any repairs, and be careful about entering an agreement with an irresponsible landlord.