The Risks of Renting to Own

Real Estate
on June 5, 2013

With tighter credit markets since the collapse of the housing bubble, rent to own has become a popular concept in the housing market. The process serves as a substitute for the standard mortgage process. It removes the difficulty of dealing with a bank. However, it also introduces the risks of working with buyers who cannot be financed through a bank. Let’s take a look at the risks and benefits for both buyers and sellers.

Buyers

Saving money to make a down payment on a home may not be feasible. Rent to own offers a route where folks who are already renting can see a portion of their payment put toward paying down ownership of a home. Likewise, rent to own takes the banking system and credit ratings out of the equation. This makes it more likely that the buyer and seller can arrive at some type of accommodation that works.

Renters also have the benefit of being able to “try before you buy.” Most rent to own contracts have a period before a purchase decision needs to be made. The downside for the buyers is that if they decide not to purchase the house, they are unlikely to be refunded any of the rent they paid earlier.

Sellers

The big upside for sellers is that a renter is an instant buyer in a rent to own situation. The rent to own buyer is likely to make a better tenant than the short term renter, since they may end up being the future owner. Opening up the market to more buyers also has the benefit of instantly expanding demand for a property. Sellers aren’t limited to only those buyers the bank will approve.

The downside for sellers is the buyer has an option, up to a certain point, to walk away from the sale. This can leave you seeking a new buyer in the future. Also, most rent to own buyers are going to be greater credit risks. These are buyers who may not be able to get credit through the banking system.

Conclusions

Rent to own can be a risky proposition. Buyers and sellers need to make sure the rent to own contract is written with both parties’ best interests in mind. With a bit of planning, rent to own can afford an alternative route to sell a home, saving money for both parties.

Found in: Real Estate
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