lease to own

How does lease-to-own really work?

When you’ve decided to purchase a home, the number of different options available to you can be overwhelming. Just figuring out what type of home you want is confusing enough, but deciding how to finance it–or even knowing what options are available to you–can have even the most savvy consumer pulling their hair out. That’s why last week we decided to explore one of these many different options: lease to own. Hopefully, we can help you untangle a little bit of the knot that is home financing!

Lease-to-own housing works in a similar way rent-to-own financing plans work in other situations, like when you are buying an instrument. You pay to rent the home, just like you would in a normal rental property, plus an additional sum that goes toward the overall cost of the home and/or the down payment on it. Most contracts last from 12 to 36 months, and sometimes you can even find an arrangement where the full cost of rent goes toward the purchase price of the home.

Of course, there are both advantages and disadvantages to lease-to-own home situations, and they are not a good choice for everybody. To make it easier to understand, we’ve rounded up some of the pros and cons of lease-to-own housing arrangements:

Pros

1. There’s no large, up-front payment

One of the most challenging aspects of buying a home is coming up with the money needed for the down payment. While the cost of down payments in the U.S. is falling, it is still not unusual to pay between 10% and 20% of the total cost of the house up front, which is a great deal more than many homeowners–especially young ones–can afford. A lease-to-own situation cuts down on or even eliminates the up-front payment, making it a much more practical option for many people.

2. You can improve your credit score

Another issue facing first-time home buyers is their credit scores. Often, they cannot get a loan large enough to purchase their own mortgage simply due to a lack of credit history, making home purchasing all but impossible. If they lease-to-own, however, the regular monthly payments will register in their credit history, which gives them a chance to up their scores and get better rates when they eventually take over the mortgage themselves.

3. It’s easier to find buyers

For those looking to sell with a lease-to-own contract, it can be much easier to find willing buyers. Many would-be buyers are hesitant to commit up-front to a house, and lease-to-own gives them a chance to both get to know the house and build up their credit. Compared to letting your house sit on the market for months, lease-to-own is an excellent deal.

Cons

1. You could lose your investment

The biggest risk with lease-to-own housing options is that you might lose your investment, including any up-front fees. If you miss a payment, or if you still can’t get the loan you need at the end of the contract, you may be forced to walk away, having spent far more than you would have if you’d simply been renting a normal property. There is also a chance that the value of the home will drop during the intervening months after signing the contract, but you will still have to pay the higher price you agreed upon at the outset, when markets were stronger.

2. Foreclosure scams

Another major fear with lease-to-own housing is the possibility that the sellers might not own the title to their home by the time the contract ends. Instead, they could pocket the inflated rental price, then disappear when the bank comes to reclaim the house. This is why it is very important to do thorough research on any lease-to-own situation you are considering. Get professional oversight from a real estate lawyer who knows the market better than you do. It could save you money and heartache.

3. Your buyers might walk away

If you are the seller in a lease-to-own situation, you are also risking the possibility that your potential buyers decide to walk away, due to falling housing prices. Depending on how the contract is written, you could be left with a house that’s worth less than it would have been if you had sold it outright when you first signed the contract. This is why it’s so important that you fully understand the legal ins and outs of the contract in the first place.

In fact, the most important rule with lease-to-own housing options is to know what’s in your contract, and what recourse you have if something goes wrong. Getting a lawyer involved who is on your side and wants to protect your interests can save you a lot of money, and ensure that you don’t end up in an even worse situation when the contract comes due. Housing is not something to take chances on. Call in a professional to help.

For more information about lease-to-own housing options, check out these other overviews from CNN and the Seattle Times.