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Pros and Cons of Rent to Own Program

A rent-to-own contract is an alternative to home loans. Here both buyers and sellers benefit from this arrangement, but everyone needs to understand its advantages and disadvantages.

This arrangement is similar to the traditional lease that landlords and tenants sign. However, the renter gets the exclusive rights to purchase the property at a specified point in the future.

Any two parties can enter into this agreement, but sometimes it is used as a part of the housing program, which gives an affordable housing option to people who want to purchase a home in the future.

Why Buy With Rent to Own?

This program is attractive to a lot of buyers, especially those who expect themselves in a good financial position within a few years. Here is the list of some benefits of rent to own:

  • Buy with bad credit: Buyers who have a bad credit score cannot apply for a home loan. But with a rent-to-own agreement, they can work on rebuilding their credit and may get a home loan in the future when it is time to buy the house.
  • Lock in a purchase price: Home prices increase every year, and buyers can get into an agreement to buy a house at today’s price. They don’t have to pay the future price. Buyers also have the option to back out, though it depends on how much they have paid and whether it makes sense or not.
  • Test drive: Buyers have the option to live in the house before committing to buy the property. As a result, they can learn about the issues, any neighbour problems, and more before it is too late.
  • Move less: People who invest in the rent-to-own agreement can live in the house before they can buy it. This reduces the cost and inconvenience caused by moving from one house to another after a few years.
  • Build equity: Technically, renters do not build any equity as homeowners do. However, the payment made towards the rent to own provides a substantial sum that is put towards the home’s purchase.

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Rent-to-Own Pitfalls

Nothing is perfect, this includes rent-to-own programs. These transactions are complicated for both buyers and sellers, which can lead to some unpleasant surprises.

Risks for Buyers

Here is the list of things you need to consider before you enter a rent-to-own agreement:

  • Forfeiting money: If you don’t buy the house, you will lose all the money you paid. The seller might make it inconvenient for you to buy the house so that they can make more money out of this agreement.
  • Slow progress: Buying a home through a rent-to-own program can take a lot of time and things might not remain the same for you financially.
  • Less control: Since you don’t have the property yet, you have very little control over it. Your landlord could stop making payments towards the mortgage and lose the property through foreclosure. You are also not in charge of making any major maintenance. Similarly, your landlord might stop paying the taxes and end up with liens on the property. When going into the agreement, you should keep all these points in mind and address them before you sign the contract. The landlord is not allowed to sell the property while he agrees, but still, you might have to fight in court to defend it.
  • Falling prices: Home prices might fall and you will not be able to negotiate with the seller. This leaves you with two options, either end the contract and lose all the money or buy a home at a higher price. Both situations are not suitable for the home buyer.
  • Late payments hurt: Depending on the terms of your agreement if you don’t pay rent on time, you might lose the right to purchase the house. In some cases, you are allowed to keep your options, but the extra payment you make for the month will not be counted towards the house’s final purchase.
  • Home issues: There might be a lot of problems with the house you don’t know until you start living in it. Treat rent to own like real purchases, so get the proper inspection and title search before you get into an agreement.

The rent-to-own program is a good alternative to traditional home loans, but it also has its own set of flaws.

It allows the buyer to stay in the home as they pay rent towards the final cost, but they are not given major rights such as maintenance and more.

So, if you are still interested in this program, look for rent-to-own homes in Canada to get the best possible deals.

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