Rent to Own in Arizona
What is Rent-to-Own Homes: A Complete Guide for Prospective Buyers
Rent-to-Own (also known as a lease purchase, right to purchase, or seller carry) is a type of transaction by which a buyer enters a contract where they agree to pay a monthly fee, in exchange for the right to live in and purchase a property at an agreed-upon date in the future. They move in now, but pay for it later.
The exact exchange and terms are dependent on the type of arrangements that the parties agree to. We’ll explore examples of those agreements later in the guide.
Rent-to-own differs from a traditional leasing arrangement in that the tenant may have the right to purchase the property at any time during the agreement, or may in some cases also terminate the agreement by returning the property to the original owner (though they may have a limited time frame in which to do so, and the penalties can sometimes be high).
Getting into a rent-to-own home agreement may be a smart choice when a prospective buyer doesn’t have the credit or funds to buy a home outright, but is in a market where prices are rising quickly and they need to get in now before they are priced out forever.
How Does Rent-to-Own Work?
While most home buyers need a mortgage in order to finance the purchase of a home, rent-to-own homes provide an alternative route. With rent-to-own, you don’t have to sweat the credit requirements for acquiring a mortgage, or save up a huge down payment, in order to buy. Instead, you can rent a home for a certain amount of time with the option to buy the home before the lease ends.
Rent-to-own is more complicated than renting, so you’ll want to do thorough research to determine whether this is the right route for you. Also, you’ll need to take certain precautions in order to protect your own interests. Consulting with a licensed Realtor with special training in these types of transactions is the best place to start.
Continue Reading: Understanding the Rent-to-Own Process
Reasons to Rent-to-Own
One of the most common reasons for taking the rent-to-own route is if a potential buyer has bad credit. This can hinder one’s ability to qualify for a mortgage and buy a home. Another reason is that a potential buyer can’t afford the down payment on the home that they want.
With rent-to-own, tenants can instead have a portion of their rent payments go toward a down payment on buying the house they are renting. However, this option can have advantages and disadvantages for tenants and landlords alike.
THE TENANT / BUYER PERSPECTIVE
If you are a prospective home buyer, then the rent-to-own option gives you time to earn money for the down payment if you want to buy the property in the future. This timeframe is typically 1 to 3 years, depending on your negotiations with the seller.
As a tenant, opting for a rent-to-home may be a good option if:
- You have bad credit and don’t qualify for an affordable mortgage
- You can’t currently afford to make the down payment on the home
- You’d like the opportunity to test the property before you buy it
- You want the added security of the purchase price of the home remaining the same throughout the contract, despite market fluctuations
THE LANDLORD / SELLER PERSPECTIVE
As a seller, the rent-to-own model can be a good option if your house has been on the market for a while and you haven’t been able to find a buyer. Or, perhaps you have had interested buyers but they haven’t qualified due to their poor credit or lack of a down payment.
Going the rent-to-own route may attract potential buyers with the appeal of them being able to build up their credit and/or save money until they are ready to buy.
Some benefits of the rent-to-own model for landlords include:
- You can lock in the future sale price of your home now, regardless of market fluctuations
- You can essentially “pre-qualify” the tenant as being a good fit since you have already
- interacted with them while they rented the home, and they will probably treat the home with more respect
- You will get a higher return on your investment since the tenant will be responsible for repairs
If the tenant fails to close the transaction, they forfeit their down payments and all monthly payments.
Are Rent-to-Own Houses a Bad Idea?
With all of the benefits of the rent-to-own purchase model in mind, you may be thinking that this is too good to be true.
The answer is a definite maybe! As it turns out, many tenants find themselves unable to purchase the home at the end of the agreement, due to the same reasons they were unable to buy in the first place: bad credit, low income, or not enough money for a down payment.
For tenants, this is bad news, because if they are unable to purchase the home, that means they spent more for a rental and have nothing to show for it. Plus, any “sweat equity” (maintenance or repairs) the tenant put into the property will not be reimbursed.
The biggest misconception with Rent-To-Own homes is that you’ll be able to rent a home and have your rental amount applied to the purchase price. While there are many different types of agreements, very few of them work exactly this way. In most instances, the reality is that you’ll be putting a little money down, making a monthly payment that doesn’t apply, and then lining up your financing later. The exception to that statement comes in the form of seller-carry financing, which we will discuss in more depth later.
Here are some additional common misconceptions of the rent-to-own model:
Rent-to-own is the best way for buyers with bad credit to buy a home.
Truth: Rent-to-own is a phrase that describes options for people that typically can’t buy a home using conventional methods. Most people believe it means that you rent a home and the rental payments are applied to the eventual purchase price. That is typically not the case.
Rent-to-own involves seller financing.
Truth: Seller financing is a unique type of agreement where a seller acts as a lender. It is an option for people to own a home who can’t qualify for a conventional loan or don’t want to utilize their own credit. Typically, it still requires a considerable down payment and usually requires the loan to be replaced with conventional financing at some point in the future. Many times it is only in place for five years, whereas traditional financing through a bank is typically for thirty years.
Rental payments are applied to the down payment on the home.
Truth: This is almost never the case. Rental payments are typically considered interest payments to the entity who holds the note.
If the tenant doesn’t buy, they get a portion of their money back.
Truth: This is almost never the case. In most cases, the value to the tenant comes in the form of equitable title. Basically, they own the equity in the home, which is derived from the difference they paid for the home and its current market value. However, this varies among different deal structures and needs to be fully understood prior to entering a contract.
Buyers earn equity during the leasing period.
Truth: In the case of most seller-financed contracts, and most lease purchase agreements, this can be true, assuming that the true market value of the property in question has increased in excess of the negotiated terms.
Where to Find Rent-to-Own Homes
If you don’t qualify for a mortgage, going into a rent-to-own agreement may be a way for you to purchase your dream home. However, you’ll need to be careful when it comes to finding the right agreement that promotes your best interests.
Note that some rent-to-own programs do not require credit, so they may not be regulated by federal law. Some states may regulate rent-to-own purchase agreements, but other states have no regulations at all, which means you (the buyer) would be taking on a lot of risk.
You’ll want to work with a trusted real estate professional to find the right property for you. Looking for rent to own homes in AZ? We can help.
Alternative Paths to Homeownership
Depending on your circumstances, rent-to-own may be the right choice for you. However, we highly recommend considering alternative paths to homeownership if you are wary of the pitfalls of rent-to-own. You do not want your hard-earned money going down the drain.
At Century 21 Northwest Realty, we help prospective homeowners like you explore their options and find the perfect path to purchase a home. Contact us to discuss the rent-to-own model and other routes to home ownership. These may include special financing for veterans, down payment assistance, seller financing, grant programs, lease purchase agreements, credit repair programs, and special arrangements with third parties like Home Partners of America.