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How to Find the Right Rent-to-Own Home

by | Apr 7, 2023 | Rent to Own, Renters

Usually, when you are ready to purchase a home, it plays out in typical fashion – save up the down payment, get your mortgage loan preapproval, put in an offer, the offer gets accepted, go through the closing period, sign the loan, get your keys, and then finish it off with the moving day.

This typical scenario is how it plays out in an ideal situation. But life hardly ever works that way, does it? Often there are issues that arise in the process of home buying and understandably so; it is a big shift in life and an expensive commitment. Sometimes you simply aren’t yet ready to own a home, but you want to work towards that goal or see if it is the right fit for you.

If you find this to be true for you, then you might consider finding a rent-to-own home. These arrangements can give you some of the best of both worlds as a renter and homeowner. However, this type of contract is less regulated than a typical rental contract, so you need to be thorough when researching this option. And rent-to-own homes are not always easy to find when looking through real estate listings.

What Exactly is a Rent-to-Own Home?

Rent-to-own homes are properties that are available for rent with the possibility or intent by the renter to purchase the home from the seller after the term of the lease has expired. When you sign the contract, you will likely have to pay a lease option fee as a kind of security deposit, ensuring your right to buy the home when it ends. Depending on the details of the specific contract, that fee may be applied toward the down payment on the house during the closing. The lease option fees typically range anywhere from 1 to 10% of the total price of the home.

Usually, the cost of the property is locked in at the time the contract is signed. Your monthly rent payments will likely include a premium that is put into an escrow account that will be applied toward the down payment. Because of this, your rent will likely be higher than the market average for your area. Keep in mind that you will see that extra money again when you go to purchase the property. If you decide not to buy the home, however, any money you paid into this or your option fee might be lost.

Though the specific terms are varied, there are two basic types of rent-to-own contracts:

  • Lease Option. This type of contract is reminiscent of your typical rental lease agreement. It also includes an option to buy the home once the lease expires. If you decide not to purchase the home, you lose any money you have paid into the property but are free to walk away without penalty. This contract would be best if you are not completely sure if you want this house to be your long-term home.
  • Lease Purchase. This type of contract indicates that you are committing to purchasing the home at the end of the lease. If you decline to buy (or it turns out that you cannot afford to do so), you will not only lose any money that you have so far paid into the property, but you may also be liable for legal action for breaking the terms of your contract.

How to Track Down a Rent-to-Own Home

Now that we have gone over what a rent-to-own home is and what you can expect once you are ready to sign a lease for one, let’s go over some tips on how to find these allusive real estate properties. Understand that most owners would prefer to sell right away than become a landlord with the possibility of selling much later on. Make a list of your needs and wants in a home, as well as what you may be willing to compromise on for the immediate future. And try to begin your search in smaller towns or in slower markets.

Find an Experienced Real Estate Agent

There is simply no replacement for having an experienced agent in your corner during the house-hunting process. Since the leases for these kinds of arrangements can vary so widely, you should specifically look to hire an agent who has experience with rent-to-own properties. Even a seller who is not looking to scam you still has their best interests at heart over yours.

A renter/buyer’s agent will advocate on your behalf and can prevent you from entering into a bad contract. But beyond that, an agent with rent-to-own experience can offer their insight, knowledge, and network on finding the right properties for you and your budget.

Check with Investment Firms

There are investment firms who buy houses off of the market with the sole purpose of turning them into rent-to-own homes. Many of these companies offer programs to locate single-family homes that their clients may not otherwise be able to find available for rent. This firm then will buy the place, set a price for its eventual purchase, and lease it to you… essentially becoming your landlord for the term of your lease.

While this is likely a more costly approach, it comes with protections against some of the issues that can come from entering into a rent-to-own contract with an individual seller. For example, if the property goes into foreclosure or the owner decides to sell the home, you will not only lose the home but you will also lose any money that you have invested into the house.

Some programs even offer contracts where you do not pay extra money toward the purchase price of the home, but that price is still set once you sign the contract. Once you are ready to buy the home, you have the right to do so within the terms of your contract.

Contact the Seller

Many rent-to-own properties are listed as such because the listing has been having a difficult time selling the home. You or your agent should consider looking into these kinds of lingering listings because the seller might be interested in a rent-to-own agreement. This would give them the chance to earn some money from the property while you both have extra time to prepare for the eventual sale of the home.

If you find such a listing, try calling the agent and making a lease-option to buy proposal. It never hurts to ask and, if you do not feel comfortable doing so yourself, your agent should be able to handle these kinds of requests.

Find a Landlord Who Wants to Sell

The flipside of finding a seller willing to become a temporary landlord is to find a landlord who may want to sell. Some people become landlords only because they weren’t able to find someone to sell their property to when they listed it. Some landlords may no longer wish to remain so, and they could be more than happy to sign a rent-to-own contract with you.

You might even consider offering to maintain and repair the home while you are renting it. If things work out, you will have the opportunity to buy a home that you have been living in and caring for already.

Look at the Pre-Foreclosure Market

If a property has already entered the foreclosure process, you cannot sign a rent-to-own lease. But catching homes that are facing foreclosure could present the chance for you to offer such an agreement to those homeowners. This could provide the owner with some income as they collect rent from you while also securing the home for you to purchase in the future.

It might be wise, if you take this route, to hire a real estate lawyer. By doing so, you will make sure to be as protected as you can be while also offering agreeable terms to the seller. Again, just as we mentioned earlier, be aware that if the property is foreclosed on while you are renting it, you will lose the house and any funds you have invested into it.

Reach Out to Friends and Family

Someone you know might be looking to sell a home. Reach out to people you know, on social media, or even on neighborhood notice boards, or specialty groups. Find out if any of these sellers might be willing to enter into a rent-to-own lease agreement with you. Don’t let an informal relationship lull you into a false sense of security, however. You still need to make sure that everything is detailed in writing and you may still want to hire a real estate lawyer to oversee the transaction.

And use extra caution when connecting outside of your normal social circles. As mentioned in this article already, there are a lot of rent-to-own scams out there. Do your research and heed the advice of your real estate agent or lawyer.

Check Out Specialty Portals

There are several websites that are specifically aimed at helping renters find rent-to-own properties. Most of these specialty portals charge a monthly fee, but it could be worth the cost temporarily. There are usually also homes listed for sale, in pre-foreclosure, up for sheriff’s sales, or foreclosure auctions in addition to those strictly listed as rent-to-own. Just make sure to look into the specifics of any individual home you find on one of these sites before you make up your mind.

Bottom Line: Don’t Settle

You’ve gone through the pros and cons of signing a rent-to-own lease. You have learned about the two main types of contracts offered on such properties. You have the knowledge of a variety of places to conduct your search.

If you have decided that rent-to-own is the path forward for you, just remember to be diligent. Hiring professionals to help you navigate the complicated world of rent-to-own contracts is never a bad decision. Get everything down in writing and don’t rush to make a decision. With any luck, all of your hard work and future rent payments will keep you moving closer and closer to owning your very own home.

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