Entering into a rent-to-own agreement is a big decision for a seller. It's important to know the pros and cons of choosing this option before taking the leap. More accurately, a rent-to-own agreement is considered a rental agreement that includes the option for the renter to purchase the home at a later date. The renter/buyer and the seller agree to the possibility of a sale in the future. In most cases, a portion of the renter's monthly payments while leasing the property are credited toward the eventual purchase of the home. It's important to note that the renter has the option to buy the home but is not obligated to do so. If the renter chooses to vacate the property and not purchase the home, the seller generally gets to keep the portion of the monthly payments that were intended for the potential sale. Let's take a closer look.

Rent-to-Own Benefits for the Seller

With the right renter/buyer, the seller can benefit from a rent-to-own in a few different ways.

  • Renter invested in home upkeep - In a rent-to-own agreement, the renter intends to eventually purchase the home. The renter is more likely to take good care of the property and invest their time and effort in the home's upkeep because they plan to own the home in the future.
  • Larger pool of potential buyers - If the home isn't catching the interest of qualified potential buyers, opening up the option of rent-to-own increases the pool of potential buyers. There are lots of people with less-than-stellar credit who struggle to get an affordable interest rate or even qualify for a mortgage who are looking for a home. Everyone needs a place to live.
  • Rental income - When you do a rent-to-own agreement, it works as a standard rental in many ways during the lease phase. This means you will earn rental income on the home while the renter/buyer is leasing it. You can then use this rental income for other investments.

Rent-to-Own Downfalls for the Seller

Like any agreement or transaction, a rent-to-own agreement isn't without its risks or downfalls.

  • Income timing - Rather than get the money from the home sale in a lump sum right away like a traditional sale, the seller gets the income from the property over time in smaller increments.
  • Locked in home price - In a rent-to-own agreement, the renter/buyer and seller agree to the potential home sale in the future which includes locking in the sales price of the home. If the value of the home increases significantly while the renter is leasing the home, the seller still has to honor the agreed to price when the renter is ready to buy. In this case, the seller loses out on the value of the appreciation of the home that occurred during the lease phase.
  • The buyer can walk away, but the seller can't - Rent-to-own agreements provide the option for the renter to buy the home, but not the obligation. This means that the buyer can walk away and choose not to buy the home, however the seller is locked into the agreement and cannot back out on selling the home to the renter except for in very limited situations. The upside for the seller is that if the renter chooses not to buy, the seller gets to keep the portion of the monthly rent that was earmarked for the eventual purchase.
  • Drop in home price - Home prices could drop during the time the renter is leasing the home. If the renter chooses not to buy the home, you could end up having to sell it at a later time for a much lower price than when you and the renter entered into the rent-to-own agreement.

If you are considering entering into a rent-to-own agreement, be sure to discuss it with your Century 21 Broadhurst agent. They can provide valuable information about the success rate of such agreements in your home's neighborhood and also explore sales options you might not be aware of such as owner financing. Ensuring you have information on all of your possible options can help you decide what is best for you and your home sale.