Spend an afternoon poring over online apartment listings, and you’ll see them: flashy ads urging you to “rent to own” a home instead of just renting.
The pictures look normal. The prices seem reasonable. But are rent-to-own houses legit?
Yes — but there are aspects of these deals that buyers need to be alert to, like tricky contracts and the possibility of losing money, says David Mele, president of Homes.com.
How rent to own works
Rent-to-own arrangements are complex, but starting one can be as simple as signing a lease. There’s just one important difference: the option-to-buy clauses. These clauses outline the terms of your purchase of the home when the lease ends, which is typically one to three years.
Beware of obligation-to-buy agreements, Mele says. Unlike an option to buy, there’s no flexibility if you change your mind.
Either way, you’ll pay a certain premium on top of your monthly rent. The extra money is stashed, preferably in an escrow account, to become your down payment. Also, both agreements may lock in the purchase price: a boon if home prices rise, but a drawback if housing values dip after you sign.
Should you rent to own?
If you can’t qualify for a mortgage because of credit issues or lack of a down payment, a rent-to-own arrangement might get the homeownership process started sooner.
A rent-to-own property allows time to repair or establish your credit while your monthly premiums build equity in your future home, Mele says.
But you’ll still have to finance the rest of the purchase price when the lease ends, and, if you can’t, you’ll likely forfeit any premiums you paid on top of your rent. If you aren’t confident in your ability to get a mortgage in time, avoid rent-to-own homes.
How to avoid rent-to-own scams
While renting to own is a real path to homeownership, be cautious. Scams abound, and can cost you. Use these tips to avoid sketchy deals:
- Research average market rents. Rent to own means paying extra each month, so anything below the going rental rate is a red flag.
- Don’t pay or offer personal info upfront. Scammers may ask for a deposit or sensitive information. Don’t provide either until you’ve seen the property.
- Inspect the seller and the home. Be sure the seller owns the home, and is current on mortgage payments and property taxes. Have the home professionally inspected and appraised.
- Know what you’re signing. Getting out of a rent-to-own agreement is difficult, so carefully examine — or have an attorney review — the agreement before you sign it. If you uncover a scam, report it to your state attorney general’s office or the Federal Trade Commission.
The article Is a Rent-to-Own Home Right for You? originally appeared on NerdWallet.
