Yes or No: Should You Rent to Buy?

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Renting to buy involves an agreement to rent a property for a set lease before opting to eventually purchase the property once the lease is over.

While you’ll have to pay higher rent premiums, renting to buy is a flexible solution for those unable to take out a traditional mortgage. The actual rent typically covers the seller’s mortgage. On top of that, you’ll pay an additional percentage of the rent called rent credit, which is basically your down payment for the home.

When done right, it allows you to own your dream home without the fuss of traditional financing. But when is it a good idea?

If you can afford it, then yes

So you can afford a home, but you don’t quite qualify for a mortgage. Perhaps your current salary means you make enough money to pay for a home, but you haven’t been at a workplace long enough to qualify for a mortgage. Or maybe the bank doesn’t consider your small business to be a stable source of income. Maybe you’ve been in debt for a while, still working on getting back in the black.

Renting to own in these circumstances is advisable, because by the time your lease is up in two or three years, you’ll (ideally) have improved your financial situation enough to satisfy the bank.

If you can’t keep up with your payments, then no

Extra expenses go into rent-to-buy arrangements. A typical rent-to-buy agreement includes a one-time, non-refundable fee called option money. This is basically your stock in the property—putting this money down gives you the right to purchase the home when the time comes.

Further,  the aforementioned rent credit is non-refundable. As a buyer, rent credit = down payments on the home should you decide to buy it later on. For the seller, rent credit is compensation for taking their home off the market, because doing so is missed opportunity for them to have the property sold right away. Bottom line, if you end up backing out of the contract, you don’t get your option money or rent credit back.

If you feel the seller is legitimate, then yes

Renting to buy occupies that gray area between renting and home-buying. On the one hand, this is a good thing, as it grants you more flexibility in negotiating terms directly with the home’s seller than with the bank. On the other, the burden of  making secure transactions is on you because this system has less stringent standards and regulations.

The truth of the matter is there are sellers out there looking to charge option money and higher rents with no intention of actually giving up their property. They can run circles around you in the contract or accuse you of not maintaining the home, and have you evicted while taking off with your money. Make sure to get advice from a real estate attorney before you sign anything, and do your own due diligence in brushing up on how real estate works.

If you think the buyer looks sketchy, then no

One way to tell if a seller could skip out on you is by looking at their track record. Do they have a bad credit rating? Are debt collectors badgering the house with calls and notices? These are red flags that signal doubt in the seller’s integrity.

Have an exit strategy: always read your contract and make sure that it’s a lease-option contract instead of a lease-purchase contract. Lease-option contracts allow you to buy the home after the lease—although for any reason, you can opt not to. However, lease-purchase contracts legally obligate you to buy the home whether you like it or not.

Also be on the lookout for less direct red flags like money or health troubles, a lawsuit, or even a divorce. Keep in mind that if the seller loses their property for any reason, e.g. the house is foreclosed, you lose your chance at owning the property, too. You don’t get back any of the payments you’ve made towards the home. Not only that, the property may be confiscated by the bank, leaving you without a home—so always be prepared and have an option B.

If you’re dead-set on buying the home, then yes

Perhaps the best thing about renting to buy is being able to test out your dream home before you decide to actually purchase it. You’ll learn about day-to-day issues you may otherwise miss, and you’ll also get a good taste of what the neighborhood is like before making a permanent decision.

On top of that, renting to buy is an investment because you’re building equity in the years the home is leased to you. Thus far, we’ve discussed how your option money and rent credit are nonrefundable should you ultimately decide not to buy the house, but if you do, this money is credited towards your down payment for the home or the purchase price itself.

In short, renting to buy means investing in a home that you dream of owning someday, while already living out the dream of being in it.

If you’re not ready to commit to the responsibility, then no

A home is a huge responsibility. You spend chunks of time and money to keep it clean, maintain it, and periodically make repairs. When you’re a renter, you share the upkeep with your landlord, but once your home belongs to you, you need to be ready to troubleshoot repairs, pay taxes, and shoulder all responsibility by yourself.

Buying a home also implies that you’re ready to settle down in the area. If you can’t see yourself living and growing in that location, it’s best not to put down roots in the first place. If you decide to leave, you’ll have to go through the trouble of ridding yourself of the home by selling or leasing. And this comes with risks—you may not see return on your investment.

So, should you rent to buy?

In summary, if you think you can afford the investment, you’re confident in the integrity of the seller, and you’re 100% in love with your potential home, then yes! Renting to buy can be more efficient in that you’re able to move into your home now and worry about the thorny stuff later. It will save you the trouble of moving into a rented home and then again into a permanent one.

On the other hand, if you’re not sure you’re ready to spend or maintain a house, or if the seller seems shady, then renting to buy may not be the best plan for you. You’d be better off with a regular lease, or waiting until you can get your finances together to buy a home the usual way.

Ultimately, the question of whether you should rent to buy depends on the state of your finances and your plans for the future.

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