Rent to Own in Arizona
Is Rent-to-Own Worth It?
Rent-to-Own Homes, Explained
While many people take the traditional route to homeownership – save, mortgage, purchase, close – this can be difficult for people who have faced financial hardship or just don’t have enough money saved for a down payment. In these cases, rent-to-own can be a good option as it allows the prospective homebuyer to rent the property as a tenant and then buy the home before their lease ends.
Some homebuyers go this route because it buys them time to improve their credit, qualify for financing, and save up for the down payment. It can also benefit a seller who might have been struggling to find a qualified buyer.
However, if this arrangement sounds too good to be true, it’s because it often is. There are some downsides to going this route vs buying a home the traditional way, but sometimes this is the only way.
Read More: What is Rent-to-Own?
Pros and Cons of Rent-to-Own
Below, we have broken down the pros and cons of rent-to-own to help you answer the question “Is it worth it?” for yourself.
- Get a shot at “The American Dream”. Rent-to-own gives people who can’t qualify for a mortgage the chance to fulfill their dream of buying a home.
- You will be able to move into the home right away. As with a traditional lease, you can move in once the lease is signed and you have agreed upon a move-in date.
- Buys you time. Going the rent-to-own route allows you to buy time to boost your income and credit while you live in the home you love.
- You can lock in the purchase price. Rent-to-own can allow the buyer to lock in a purchase price, hedging against a skyrocketing market.
- Test out your home and neighborhood. During your rent-to-own agreement, you get to live in the home and try out the neighborhood while saving for a down payment.
- Build equity. Some forms allow a tenant to build equity and own that equity even if they can’t ultimately close the deal (i.e. lease purchase).
- You must pay the Right to Purchase price. You will need funds to pay the Right to Purchase price if you choose to go with a Right to Purchase agreement.
- You still need to save for a down payment.
- Some rent-to-own agreements require a large up-front “option fee”.
- You will still need to qualify for and obtain a mortgage loan. As a rent-to-own home buyer, you will need to obtain a mortgage loan from a third party at some point in the future, so you may need to seek credit counseling.
- The value of the home may not increase. The value of the home may not increase above the price at which the resident has the Right to Purchase – i.e. the Right to Purchase Price may be higher than the value of the home.
- If you don’t qualify for a mortgage, you can’t purchase the home. You may not be able to exercise the Right to Purchase if you do not have the down payment, or don’t qualify for a mortgage loan from a third party when it comes time to purchase.
- They are often unregulated. Since rent-to-own programs do not require credit in order to lease, they are excluded from regulation by federal law. Note that regulation may differ from state to state. This means that you (the buyer) are assuming all the risk.
Avoid Common Rent-to-Own Pitfalls
Even while rent-to-own may seem like it presents the perfect option, there are quite a few pitfalls, as well as people willing to take advantage of prospective homebuyers. These types of agreements and transactions are complicated, making people vulnerable to scams and other unpleasant surprises.
Make sure you work with a local real estate agent before you sign a rent-to-own contract so you can avoid any of these common blunders.
Risks for Buyers
- If you don’t end up buying the home, you will likely lose all of the extra money you paid toward the house. For this reason, unscrupulous sellers may make it contractually difficult for you to buy so they can pocket that money for themselves.
- Even if you plan to save money and improve your credit score over time, things don’t always work out as planned. If you don’t qualify for a mortgage and/or can’t make the down payment, you won’t be able to buy the home.
- Since you don’t yet own the home during the lease, you must make sure that the seller has the ability to transfer title free and clear. If the home was financed, it could be foreclosed. Don’t enter rent-to-own agreements on properties that have existing loans.
- If home prices fall, you may not be able to negotiate a lower purchase price, so you may be left with the choice of either buying the home or forfeiting your option money.
Risks for Sellers
- The tenant may decide not to buy, and if they don’t, you’ll have to start over and find another buyer.
- With rent-to-own, you won’t get a large amount of money up-front, which could make it more difficult for you to buy your next home.
- If home prices fall and the tenant doesn’t end up buying the property, you would have been better off selling it to begin with.
Things to Consider Before Signing a Rent-to-Own Agreement
By now you know that there are pros and cons to pursuing rent-to-own as a path to homeownership. Familiarize yourself with these so you can be confident in making the best decision for you and your family.
We also suggest considering these factors before signing a rent-to-own agreement:
- Beware of any home or property that is in drastic need of repair.
- Engage a title/escrow company to handle the contracts and money
- Have a qualified real estate agent review the contract before you sign.
- Get a home inspection before signing the rent-to-own contract.
- Work with a lender so you know exactly what you need to do to get pre-approved for a mortgage loan so you can be confident that you’ll qualify when it’s time to buy.
- Negotiate a lower option fee and monthly pre-possession payment.
- Get your Agent to perform a competitive market analysis on the house so you can make sure the offer price is likely to be at value at the time of close of escrow; otherwise, it may be next to impossible to get a mortgage loan for it.
Click here to learn more about the Rent-To- Own Process
Is it a Good Idea to Do Rent-to-Own?
The question of whether rent-to-own is “worth it” is rather subjective, as it depends on each buyer’s unique circumstances and needs, as well as the skill and experience of the Realtor who helps negotiate and structure the agreement. In any case, it’s important to note that there are inherent risks, but also many benefits to pursuing this type of arrangement.
Most qualified real estate professionals suggest that it’s better to plan your life, save, manage your credit, and then buy when you are ready. This is the best way to get the most bang for your buck and avoid any common rent-to-own mishaps. But if this isn’t an option for you, then rent-to-own may be the way to go.
Discuss your options with a trusted real estate agent today. Our team can help you understand the rent-to-own process and decide whether this is the best route for you and your family.