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The Pros and Cons of Rent-to-Own Contracts

Rent-to-own lease agreements became popular relatively recently with the downturn in the housing market during the late 2000s. They are especially good options for homeowners struggling to sell their house off the market and potential homebuyers with poor credit who have trouble obtaining home loans. Below is a general list of the pros and cons of using rent-to-own lease agreements.

The Pros of Rent-to-Own Contracts

  • Homeowners get the opportunity to go ahead and move out while still receiving money to cover their mortgage.
  • Homeowners get tenants that are more long-term than average and who have an interest in taking better care of the property.
  • Tenants get extra time to save up for a down payment as well as improve their credit score.
  • Tenants can experience what day-to-day living is like in the house before making up their minds whether or not they want to purchase.
  • Tenants can usually get approved for a rent-to-own when they are having trouble getting financing to purchase a home outright.
  • Tenants can lock down the purchase prices that will be at below market rates when it comes time to buy in 3–5 years.

The Cons of Rent-to-Own Contracts

  • Homeowners still run the risk of the tenant not purchasing at the end of the contract, thus requiring them to list the property again and find a new tenant.
  • If the home’s value rises, the homeowner may be forced to sell at a below market rate.
  • Although the tenant is receiving a sort of “equity” in the house, unlike with a mortgage, only a portion of each rental payment is credited toward the purchase price.
  • If the tenant decides not to exercise the purchase option, it is unlikely that he or she will receive a refund of the money credited toward the down payment.
  • The tenant may have to pay a higher monthly rental payment because part of the payment is being credited toward the purchase price.

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