3 Common Mistakes Rent-to-Own Buyers Make


3 Common Mistakes Rent-to-Own Buyers Make

By Dr. Teresa R. Martin, Esq.

A rent-to-own arrangement can make home ownership a step closer even if you do not currently have the money to buy a home. But, you need to be aware of the pitfalls.

How It Works

Under a rent-to-own arrangement, you rent a home at a slightly higher than average rate with an agreed upon potential purchase date and purchase price for the property that can be several months to several years away. You can purchase the property at any point during that time. Usually upon purchase, the seller will credit part of your rent back to you that you can use toward a down payment or closing costs, etc. If you do not purchase the property, however, then the full rent you paid stays with the seller.

Three Big Pitfalls for Buyers

Usually, what trips up rent-to-own buyers is that they do not exercise their full due diligence throughout the process. Here are three key areas to pay attention to:

1. Not investigating the seller. If the seller is in financial trouble, then there is the risk that the seller could lose the house before you are able to buy it. In another scenario, if the seller is dishonest, he or she can try to illegally refuse the sale at the end of the term. To prevent this make sure you take a look at the seller's credit report to look for signs of financial instability. You can also get a copy of the condition of title report. This will tell you how long the seller has owned the property. A longer period could indicate that more equity has been built up.


2. Not investigating the market. In short, you should not agree to a lease arrangement until you have done some market research as well as a professional home inspection. In this way you will be able to determine if the purchase price is reasonable before signing the dotted line.

3. Not paying enough attention to the contract. Make sure you are clear about the contract's terms and conditions. In particular, find out who will be responsible for maintenance or repairs as well as which types of changes or improvements you will be allowed to make to the home throughout the term of the lease. Also, look out for the words "lease-option agreement" as opposed to "lease-purchase agreement." The latter option requires that the buyer purchase the home by the end of the lease period, and there will be legal ramifications for backing out.

In short, rent-to-own arrangements can be great if you know that your financial situation will improve in another year or two. But, make sure you go in with the right due diligence.