Advantageous for Sellers
The rent-to-own process can put extra money into the seller's pocket. Renting to own allows a seller to offer the home to buyers who do not currently qualify for a home mortgage. This broadens the pool of potential buyers. Offering a home as rent-to-own may also allow the seller to get a better price if the local real estate market is soft at the time of purchase. If the buyer on the rent-to-own elects to not buy the home, the seller still receives above-market rental payments for the term of the contract.
Seller Drawbacks
The biggest downside for the seller would be the loss of any appreciation in the home's value between the time the rent-to-own contract starts and when the buyer pays for the home, usually two to three years later. That value gain goes to the buyer if he follows through and purchases the home at the contract price. Another potential downside occurs if the buyer fails to buy the home. In this case, the house was off the market for the term of the lease contract, and the seller might have missed out on more favorable market conditions in which to sell.
Beneficial for Buyers
Rent-to-own allows buyers to lock in the price of a home and then build up credit toward the down payment through higher monthly rental payments. The rent-to-own contract period also gives buyers time to build or repair credit and the ability to show prospective mortgage lenders a capacity to make housing payments in a timely manner. Buyers can also generate equity in the home without actually owning it if the value goes up during the rent-to-own contract period.
Buyer Pitfalls
Buyers using rent-to-own must qualify for a regular mortgage by the time the contract expires. If a mortgage cannot be acquired, any extra money above market rental rates paid into the rent-to-own contract is lost. Also, if the market value of the home falls, the buyer either walks away from the contract, renegotiates a lower price or pays an above-market price, if he can get the financing. Another danger with rent-to-own is that this type of purchase contract is unregulated and, unless a lawyer is consulted, the lease may favor the seller more than the buyer.
