How do you do rent to own

13 Min Read | Sep 20, 2022

For a lot of people, buying a house is a dream come true. But homes these days are crazy expensive, and you might be feeling discouraged because saving for a down payment or applying for a mortgage has been a challenge.

You might think choosing a rent-to-own home sounds like a good alternative to buying a house. But what is rent-to-own and how does rent-to-own work?

A rent-to-own home—sometimes called a lease-to-own home—is a house you rent for a limited time, then buy when your lease ends.

To help you make a smart decision on your homeownership journey, I’ll share exactly how rent-to-own works and help you weigh the pros and cons. Plus, I'll look at other ways to buy a home. Even in a crazy market, it is possible!

1. What Are Rent-to-Own Homes?
2. How Does Rent-to-Own Work?
3. Types of Lease-to-Own Programs
4. Is Rent-to-Own a Good Idea?
5. Pros and Cons of Renting to Own
6. Is Rent-to-Own Worth It?
7. Alternatives to the Rent-to-Own Process

What Are Rent-to-Own Homes?

A rent-to-own home is a house you rent for a year—or maybe a few years—before you buy it.

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To live in a rent-to-own home, you’ll sign a contract agreeing to the length of the lease, home price and other factors. (I’ll get to all that in a bit.) The lease contract also spells out if the landlord has to put a certain amount of your rent payments toward the purchase price of the home. 

How Does Rent-to-Own Work?

Lease-to-own programs are different than the typical home-buying process because they delay homeownership. So, if you’re not ready to commit to a purchase, you can live in the house as a renter in the meantime.

I’ll get into the basic steps of how to rent to own a house. But first, I want to be crystal clear: I’m not recommending this! I just want you to understand how it works so you can see how complicated these contracts can be . . . and why you should avoid them at all costs!

Negotiate a purchase price.

Before you sign a rent-to-own contract, you’ll need to agree on a purchase price. Many rent-to-own agreements name the home purchase price up front. The price could be based on the home’s current value or a predicted one. If the seller thinks the house will be worth another $20,000 in five years, they’ll lock in that price now, and you’ll have to pay it . . .  even if the house doesn’t go up in value. Yikes.

When the home value is predetermined like that, it’s set in stone as soon as the buyer and seller sign the contract. But in other cases, the rent-to-own agreement says the buyer and seller can set the purchase price after the lease expires.

Determine if rent payments go toward the purchase price.

You’ll need to negotiate whether any of your rent is applied to the principal value of the home.

One question people always ask about rent-to-own homes is, “Will my monthly payments be lower?” The answer is no!

In fact, lease-to-own rent payments are typically higher than regular rent prices in the same area. That’s because most sellers set aside a percentage of your rent payment each month as a credit toward your future purchase. Because they set that money aside for you—instead of putting it into their own pockets—they raise the rent to make up the difference.

If you’re looking for rent-to-own homes with low monthly payments, don’t get your hopes up.

Even if your rent doesn’t go toward the purchase price, rent-to-own homes usually cost more than renting a regular apartment because you might be stuck paying for upkeep.

Find out if you’re responsible for repairs and upkeep while renting.

In rent-to-own agreements, the seller may require you to cover random costs like home repairs and maintenance, homeowners association (HOA) fees and property taxes while you’re renting. That means you could find yourself on the hook for everything from landscaping fees to repairing a broken air-conditioning unit. Ouch!

That’s why it’s so important to comb through the contract with a real estate attorney who can clearly explain what each party is responsible for. Not doing so could cost you big time.

Agree on the term and type of lease-to-own contract.

You and the seller will agree to a lease term in the contract. That’s how long you’ll rent the home before buying it—usually anywhere from 1–3 years. But the term could be shorter or longer depending on your situation.

You’ll also both agree to the type of rent-to-own contract you want—either a lease-option agreement or a lease-purchase agreement (more on those soon).

Pay a nonrefundable, up-front fee.

Okay, so you’ve agreed to a contract. Now you’re required to pay the seller a onetime, nonrefundable fee—aka the option money, option fee or option of consideration—to show the seller you’ve got skin in the game.

This locks in your opportunity to buy the house. Sometimes the seller will put this amount toward your down payment. You can expect to pay a percentage of the home’s purchase price—typically 5% or less—as your option fee. So, you’ll need to have some cash saved before entering into a rent-to-own agreement.

Transition from renting to buying the home.

Unless you save up enough cash to buy the house outright when your lease ends, you’ll need to get a mortgage when it’s time to buy the property.

At that point, your mortgage lender will set a closing date when you’ll take ownership of the property. Depending on the terms of the rent-to-own agreement, the rent money set aside for your purchase (and possibly the option money) will be credited to you as part of your down payment.

But—plot twist—if you don’t qualify for a mortgage, the option to buy the home could expire.

Read your contract carefully and get a home inspection.

Before signing a contract, make sure the terms are right. Read the fine print too. It’s a good idea to have an attorney or a real estate pro look at the contract.

Also, research the home to make sure the agreed-upon price isn’t more than the house is worth. It’s a good idea to get a home inspection and an appraisal to save you any surprises once it comes time to buy the house.

Types of Lease-to-Own Programs

There are two main types of contracts when you’re getting a rent-to-own home. They both lay out the terms for renting the house during the leasing phase, but they’re different when it comes to the buying part. Let’s take a look at lease-option agreements versus lease-purchase agreements.

• Lease-option agreements: These contracts give you the option to purchase the home after the agreed-upon leasing period . . . but you don’t have to buy it. So if you might want to buy the home, but you’re not 100% sure yet, the lease-option contract gives you an out if you change your mind.

• Lease-purchase agreements: These contracts legally obligate you to buy the house after your lease ends. There’s no backing out and no changing your mind—at least not without paying a lawyer thousands of dollars to get you out of the deal.

Is Rent-to-Own a Good Idea?

Rent-to-own programs might sound like a good idea to buyers who don’t qualify for a mortgage yet but want to get their foot in the door—literally!

The downside is rent-to-own homes come with big risks to consider. Let’s dig into some of those pros and cons.

Pros and Cons of Renting to Own

I’m going to start with the pros of renting to own, but spoiler alert: The cons definitely outweigh the pros!

Pros

You can avoid buyer competition. At the end of the lease term, you won’t have to compete against other buyers for the property if you have a rent-to-own agreement. And that’s a huge relief given how competitive the housing market has been the last couple years!

• Everything is negotiable. Because the process of buying rent-to-own homes is less regulated than a typical buying or rental process, there’s no standard rent-to-own contract. The terms are completely negotiable. If you’re entering into a rent-to-own program, you need to talk to a trusted real estate agent and an attorney on the front end to make sure you understand—and are okay with—the terms of your unique contract.
   
• You build a down payment over time. Instead of forking over a significant down payment when you move in, you build equity over time by paying higher rent. That said, this is only the beginning of a down payment. It probably won’t cover the full amount. For example, imagine you pay $1,500 a month in rent, and the landlord puts $300 of that payment toward your home purchase for the next two years. That’s only $7,200. With median home prices over $400,000 these days, that’s less than 2% down.1 Oof! That’s not nearly enough of a down payment. You need at least 5% down if you’re a first-time home buyer or 10–20% down if this isn’t your first time buying a home. So, you’ll need a plan to save for the rest!
   
• You don’t have to qualify for a mortgage right away. You could be drawn to a rent-to-own program because you can’t afford to buy a home just yet. Maybe you’re still paying off debt or you don’t have a down payment saved. Those are totally valid reasons to hold off on getting a mortgage. And moving into a house without qualifying for a mortgage first might seem like the perfect solution. You can have your cake and eat it too—or can you?This “pro” is actually a pretty big con. Here’s why: Your rent-to-own agreement is way more likely to fall through if you’re already in a financial mess. If your money situation doesn’t change drastically while you’re renting, you still won’t be able to get a mortgage when your lease ends—putting you right back at square one.

Cons

Your rent will be more expensive. When your contract is set up so part of your rent goes toward home equity every month, your rent will be higher. You’re basically stuck in a forced savings plan where you feel pressured to buy a house at the end—whether you’re ready or not. Why not just rent a place for less money and set aside savings for a down payment in your own bank account instead of your landlord’s?

• You’ll pay extra for fees and repairs. Remember, you’ll have to pay that up-front fee (see above) for the option to purchase the home down the road. But if the deal doesn’t work out, you won’t get that payment back. And don’t forget—you may be responsible for all repairs and upkeep even while renting. Unexpected emergencies can burn a serious hole in your pocket for a house that doesn’t even belong to you!
   
• You could pay more than the home is worth. The purchase price you lock in at the start of the rent-to-own contract is usually inflated to cover rising home values. But if you lease for a couple years, you have no way of knowing what the real estate market or local economy could do during that time. Sure, your home value could go up, but it could also drop. That means you could end up paying more than the property is actually worth. Or if you’re getting a mortgage, the bank might not lend you money on a house with a low appraisal.
   
• You lose money if you decide not to purchase the house. Let’s say you get a new job that requires you to relocate. Maybe you still can’t qualify for a mortgage at the end of the lease term. Or maybe you just decide this house isn’t for you. If you’re in a lease-option agreement, you can walk away from the contract. But what happens to all the cash you forked over in higher rent and option money? That’s thousands of dollars you won’t get back. (Cringe.) And if you’re in a lease-purchase agreement, you’re just plain ol’ stuck.
   
• Rent-to-own contracts favor the seller—not you. With rent-to-own homes, the seller has most of the power. They make money either way—either by renting out or selling the house—and they know most people who go for lease-to-own deals are in a tight spot financially. So they give themselves lots of ways out of the deal. Something as small as a late rent check or not paying for a repair in a “timely manner” could free the landlord from any obligation to honor the contract. And there won’t be a knight in shining armor headed your way to save the day—or your deal.
   
• You could lose the down payment you build. If the landlord’s financial situation changes and the house goes into foreclosure, the house suddenly belongs to the bank or mortgage lender—not you. Or the seller could just up and change their mind. In that case, you’d have to take expensive legal action to enforce the contract. That’s a cost you might not be able (or willing) to pay. I don’t want to scare you, but these are realities.

Is Rent-to-Own Worth It?

When it comes to lease-to-own homes, the cons outweigh the pros. Rent-to-own agreements have way too many loopholes. They’re not a guarantee. Plus, you’ll lose a ton of money if the deal goes sour.

So keep your money in your own bank account and steer clear of rent-to-own contracts. They’re not worth it!

Some people might tell you to rent-to-own because you can live in a house while you get your finances in order, but the truth is, you’ll be much better off just renting and skipping the “to own” part of the equation.

Alternatives to the Rent-to-Own Process

Rent-to-own might sound good in the short term, but it can turn into a big pile of regret in the long run. Trust me—it’s worth it to wait so you can buy a house the wise way, without a risky rent-to-own agreement.

Here’s what to do:

• Keep renting. There’s no shame in renting while you pay down debt and save an emergency fund. In fact, that’s the best thing you can do!

• Keep saving. After your finances are in order, start saving for a big down payment. Don’t buy a house—or sign an agreement to buy a house—when you’re broke!

I know cleaning up your finances and saving a down payment isn’t easy. It takes hard work and patience. But it’s worth it!

If you do it, you’ll set yourself up to pay off your house as fast as possible. And when you move into your new place, you’ll have peace of mind knowing you made a choice that will bless your family for years to come.

Find a Real Estate Expert

Buying a house the traditional way may take more time—in fact, it probably will—but you’ll be glad you put in the hard work and patience. When you’re ready to buy, a good real estate agent can help you find a house you’ll love that’s also in your budget.

I recommend working with a RamseyTrusted real estate agent. They’re top-performing agents who’ve made the cut and become part of our Endorsed Local Providers (ELP) program—the fast, easy way to find an agent you can count on. ­­­Find a RamseyTrusted ELP near you!

About the author

Rachel Cruze

Rachel Cruze is a #1 New York Times bestselling author, financial expert, and host of The Rachel Cruze Show. Rachel writes and speaks on personal finances, budgeting, investing and money trends. As a co-host of The Ramsey Show, America’s second-largest talk radio show, Rachel reaches 18 million weekly listeners with her personal finance advice. She has appeared on Good Morning America and Fox News and has been featured in publications such as Time, Real Simple and Women’s Health magazines. Through her shows, books, syndicated columns and speaking events, Rachel shares fun, practical ways to take control of your money and create a life you love. Learn More.