Rent-to-own homes work by allowing a renter to lease a property with the option or obligation to purchase it after a set period, typically 1 to 3 years. Here's how the process generally works:
- Lease Agreement with Purchase Option: You sign a rent-to-own contract that lets you rent the home for a fixed period while securing the right to buy it later at an agreed-upon price or based on future market value
- Option Fee: You usually pay a one-time, non-refundable option fee upfront (often 1% to 7% of the home's value). This fee secures your exclusive right to buy the home later and can often be credited toward the purchase price if you proceed
- Monthly Rent and Rent Credits: Your monthly rent is typically higher than market rent because a portion of it (called rent credits or premiums) is set aside to accumulate toward your down payment or purchase price
- Purchase Price: The purchase price is usually agreed upon at the start of the lease, though sometimes it may be determined at the end based on market conditions. Sellers may set a higher price to account for expected market appreciation during the lease term
- Lease Types: There are two main types of agreements:
- Lease-option: You have the option but not the obligation to buy at lease end.
- Lease-purchase: You are legally obligated to buy when the lease ends
- Maintenance Responsibilities: The contract specifies who handles maintenance during the rental period, which can vary and should be clarified before signing
- Final Purchase: At the end of the lease, if you decide to buy, you apply your accumulated option fee and rent credits toward the down payment and must qualify for a mortgage to complete the purchase
If you choose not to buy or cannot secure financing, you may lose your option fee and rent credits, and depending on the contract type, could face legal consequences
. In summary, rent-to-own homes provide a pathway to homeownership by combining renting with a future purchase option, helping renters build equity and save for a down payment while living in the home
