Many people who don’t have down payments to buy a home will often consider doing a lease-to-own agreement to get the home of their dreams.
These are almost always a case of buyer beware because in most scenarios the leasing agreement is written to protect the seller and not the buyer of the home.
A lease-to-own agreement is one where generally a home seller will offer a buyer the ability to rent a house. A certain percentage of the rent is designed to be put aside, usually in escrow, to add up until the buyer has enough to have a substantial down payment. In theory this sounds like a win-win situation for both parties. The seller will be making money while helping someone out to buy their home, knowing that in the end the home will be sold for the current market rate. They’re basically going to continue to make money on the house and have a buyer in the end. The buyer is given the opportunity to slowly build up funds to use as a down payment for a home while they would normally just be paying rent on a house and struggling to put the extra cash aside. In a perfect world they would end up living in the house they will eventually own, have a substantial down payment and be able to build their credit up while preparing to get a loan. They’ll probably have a better chance of obtaining a loan with a larger down payment, which they’re going to have because the seller is setting aside a portion of their rent each month for a down payment. The truth of the matter is that most lease-to-own situations are not set up to benefit the buyer. While there are definitely cases where the program has worked out for both parties, generally speaking the terms of the contract are written so that the renter/buyer is under such strict rules. Usually the smallest break of terms can cause them to not only lose all the money they thought they were saving but end up without a place to live. The money they are putting towards rent is often fairly high and the justification to this is that it’s because a portion of it is going directly towards the purchase of the home. This all sounds solid and logical but the reality is that if you were to rent a cheaper place and take that extra amount and save it each month it would add up with interest a lot faster. Many contracts are also written so that while you are technically nothing more than a renter you become a renter that’s also responsible for the upkeep and maintenance of the house. You may say well it is going to be our house anyways so why would that matter? Yet the truth is there is a higher chance that you may never own this home yet end up spending thousands in repairs and updates under the assumption that this home is going to eventually be yours. For example, if you are renting and the furnace breaks down you call the landlord; in the terms of many contracts for rent to own situations you are typically responsible for repairs. Sounds great until the reality is that you’ve put a $2,000 furnace in to replace the ancient one that was in there and then when you are one day late on a payment only to get an eviction notice and breach of contract letter.