Rent-to-own agreements and the path to homeownership

If you're ready to become a homeowner but don't have the financing to commit to a sale right away, you can look into getting a rent-to-own agreement for a property that you want.

Through this arrangement, the current homeowner places the property on the rental market. It comes with a more complex agreement than a standard lease and has one special provision saying that you can buy the home after a certain time during the lease term. When you sign, you're required to pay a one-time, nonrefundable deposit, which is called the option consideration and can range from 1 percent to 7 percent.

The contract will typically include rent details, such as how much you pay each month, landlord responsibilities, circumstances that can lead to eviction and so forth. In addition, there will be an indication of how much of your rent, if any, is credited to the home purchase price, which is also included in the contract.

Through this arrangement, you get the benefit of a more financially advantageous route to becoming a homeowner. The landlord gets the tax deductions and possibly a better sale price than what the market is currently offering.

What are the risks?

Before agreeing to a rent-to-own contract, there are several things to keep in mind if you want the arrangement to go smoothly. Here are some risks to consider:

• The rent can be expensive. While renting the property, your monthly payments will likely be higher than the market average. This is because of the portion that is being put toward the purchase price.
• You need to get financing before the lease ends. A rent-to-own agreement is a great way to build credit and live in the home you want while you do so. However, if your financial standing hasn't improved enough to become eligible for a mortgage and you've committed to buying the property, you could lose a lot of money and find yourself in a tough spot.
• Get a home inspection. Although the method in which you purchase a home is different, you still need to ensure that it doesn't need any major repairs. Before signing a contract, order a property inspection so that you don't move in and commit to buying only to discover issues during your lease term.
• Read the contract thoroughly. Given that you're putting a lot of money into the deal, the lease needs more than a quick glance. Ensure that there are no infractions or other provisions that allow the landlord to evict you for minor reasons.