Ask Money

Rent-to-own

Chris Farrell Jun 22, 2010

Question: I’ll be graduating from a Ph.D program this summer and I’m one of the lucky ones who has found a job as a professor at a small college in rural Ohio. Home prices in the area are really depressed, and some owners and real estate agencies are offering rent-to-own homes with option fees around $1000 and rent around $550. Home prices for 2-3 BR homes in the areas I’m interested in living in range from $65,000-150,000

Here’s my dilemma. I have about $10,000 in student loan debt and no money for a big down payment for a house. I’m also not 100% sure that I will want to stay in the area permanently. Yet I am completely uninterested in living in an apartment complex for the next few years while I pay off loans and begin saving for a down payment for a house. I’ll probably end up renting a house, since rental prices for houses are about 550-700. My question is this: If I find a desirable house, should I consider rent to own as an option? What are the risks involved in renting to own? Do I need to/should I hire someone to examine the contract for me? Thanks so much for the help! Danielle, Lafayette, IN

Answer: There are exceptions, but in general it’s rare for people to come out ahead with hybrid products, and that includes rent-to-own.

I would focus on getting the best combination of price and living situation on a rental home in your new town. I’d then set up a monthly savings program. You could use that money later on as a down payment on a home if you decide to stay in the area. You have a lot of unknowns about your future and with this rent-and-save program you keep your financial flexibility.

If you do decide pursue a rent-to-own deal you definitely need a real estate lawyer to go over the contract carefully with you. There is a lot to understand. In the typical deal, you negotiate a future purchase price with the seller. You also pay a fee or small down payment to the seller at that for the right to buy the property at the agreed upon price. Your monthly rent is usually above market, too. The option fee and the rent premium are credited toward the purchase. Of course, if you don’t go through with the deal you’ll probably lose the fee and the rent premium. But, like all contracts, everything is negotiable.

I still prefer rent-and-save to rent-to-own.

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