December 6, 2022 / 11 minute read
How to Find Rent-to-Own Homes & Secure Your Dream Property
A rent-to-own agreement may be exactly what you need to secure your dream property and take it off the market, even if you can't afford to buy it just yet.
You might have never heard of this type of agreement, or perhaps you thought they were a 'thing of the past'. You may also have heard that rent-to-own agreements have terms and conditions that are unfamiliar or slightly out of the ordinary. However, with a bit of knowledge about rent-to-own, you will be able to negotiate your way to your dream house.
What is a rent-to-own home?
A rent-to-own home is a property that you commit to renting for an agreed period of time, with the option to buy it before the lease term ends.
Renting-to-own is a straightforward process. This unique agreement allows you, as a renter, to purchase your rented home from the landlord after a specific leasing period. You can expect to pay a lease option fee upfront, which is essentially a security deposit that ensures your right to purchase the house after the agreed-upon period.
With rent-to-own houses, the house's purchase price is locked in upfront, and a portion of the rent payments are set aside in a separate account to be applied towards the down payment.
How to find a rent-to-own home?
There are several ways to find rent-to-own homes. Sourcing your own rent-to-own home may take a bit of creativity and searching but when you find the perfect property, the reward will be worth all the effort.
Happy in your existing rental? There's no harm in asking your landlord
If you're currently renting and are happy with the house, consider starting a conversation with your landlord to see if they'd be open to a rent-to-own agreement.
This approach has several benefits. You already know you like the property, and your landlord is more inclined to trust you as you have a previously established relationship. If you have been maintaining the property and have always paid your rent on time, they will already know you are a responsible tenant.
Be prepared and well-researched when you approach your landlord. They may have never heard of a rent-to-own structure so be sure to explain the process in detail. You might want to convince them by taking on maintenance costs or offering an above-market rental rate.
Make a list of what you need from a property
Before you start looking for a rent-to-own property, consider your needs. Common considerations include the property's location, number of bedrooms, and desired outdoor space.
Divide your preferences into a list of “must haves,” “strongly desired,” and “preferred” qualities. For example, if you plan on buying a home and starting a family, a second bedroom may be your “must have,” while living close to the water may be a “preferred” quality.
You might need to be flexible when property-hunting as finding a rent-to-own property can be a bit more challenging than a regular rent or buy. If you are willing to compromise, you are more likely to find and secure an excellent opportunity.
Use an online property listing search engine
Luckily, online property listing websites have made it easier than ever to find rent-to-own homes. Some of the websites will have regular listings, houses in foreclosure, or homes at auction, so you'll have plenty of choice available.
ZeroDown makes it easy to navigate rent-to-own homes. With our simple search engine features, you can easily filter to look only at homes offered on a rent-to-own basis.
Research brokerages with rent-to-own programs
Today, more people than ever are looking for alternative ways to get on the property ladder, and as such, rent-to-own specialists like ZeroDown are on the rise. It's not hard to see why; people are looking for a way to build a strong credit score, pay rent, and invest in their future with the opportunity to become homeowners.
As rent-to-own properties are less regulated than traditional home ownership agreements, you may be able to negotiate specific terms into your rent-to-own contract when working with a brokerage experienced in rent-to-own properties. It might even be possible to keep the money you have put aside in a down payment, even if you decide not to buy the house at the end of your lease.
Look at properties that have been on the market for some time
You could be more likely to secure a rent-to-own contract with someone that is having trouble selling their property.
Consider this tip: filter property listing by reversing chronological order in the search options to see which properties have been on sale the longest.
You could tempt owners by offering to maintain a property that is otherwise sitting empty and neglected. This takes the burden off the homeowner, especially if they don't live nearby the property, and can save them some money in both the short and long term.
This technique for finding rent-to-own properties doesn’t come without its downside. If a property has been sitting on the market for a long time, there is normally a reason. Try to find out why people don’t want to buy it and consider whether these are reasons you could live with or work to resolve. If you try this method of finding a rent-to-own property, it’s a good idea to approach it cautiously.
Consider rental properties that have been on the market a while
Sometimes, when people have trouble selling their home, they become landlords unintentionally by renting out their home. However this could also mean they are struggling to find tenants due to the same issues they had when trying to sell.
Much like the sales listing method for finding rent-to-own properties, you can look up rental properties that have been on the market for a long time. These landlords may be more likely to agree to a non-traditional arrangement, in order to take a property off their hands.
You may have to do some additional research to understand why the property hasn't already been rented. One of the reason's the property hasn't been rented could be the inflexibility of the landlord, however, which would be detrimental if you're offering a unique approach.
Explore the pre-foreclosure market
You might want to consider homeowners at risk of pre-foreclosure, or even foreclosure. These owners may be open to a rent-to-own contract if they are not yet at the stage when the property is out of their control.
Pre-foreclosure is the first phase of legal action when a mortgage borrower is no longer able to repay their mortgage. It refers to the time period before the lender completely defaults on their mortgage payment but before it goes into official foreclosure. The pre-foreclosure period depends on state law and can last between 30 and 120 days.
Foreclosure is the final stage of legal proceedings and happens when your property has been transferred into the possession of a mortgage lender. Foreclosed properties are either repossessed by the bank or sold at auction so that mortgage lenders can recuperate the money they lent.
To find foreclosed properties, you can look online at specialized websites such as foreclosure.com
Talk to a local property agent
Of course, you could always follow a more traditional route and talk to an experienced local real estate agent. Tell them about your desire to secure a rent-to-own property. Agents are well connected in their respective property markets and may know landlords already willing to rent-to-own. There may be agent fees involved though, so it's best to ask upfront about any costs involved.
Research the seller
When searching for a rent-to-own property, it's important to research the seller too. Look for signs of financial distress, reasons for selling or renting, their relationship with past renters etc. You should also get a property report to find out how long they have owned the house in question. The longer they have owned the property, the more security you have working with them.
Reach out to your network
Consider using the ZeroDown calculator to see how much house you can afford. This calculator is a great tool to ensure you can afford that dream property once you've found it.
You should consult a sales agent and a lawyer to help define the terms of your rent-to-own contract before you find a house. It's worth also getting a mortgage pre-approval to show that you can afford the house you want, as many sellers won't talk about contracts without a pre-approval letter.
Remember that your pre-approval does not guarantee that you will be approved for a mortgage when your lease period is over and you want to apply for a mortgage to purchase the house. Maintaining consistent, stable, and positive finances during your leasing term is always important.
Here are some key takewaways and frequently asked questions about finding rent to own homes:
How does rent-to-own work?
- Find a rent-to-own house
- Sign agreement (purchase price, rental term, maintenance roles) - either a lease option or lease purchase.
- You pay monthly payments as agreed
- At the end of the rental term, you apply for a mortgage with the money you’ve saved as a down payment.
For more details see our complete guide to rent-to-own homes.
What types of rent-to-own agreements are there?
Lease Option Agreement
- Lease option agreements give you the option of purchasing the property at the end of the lease. You pay an 'option fee' to secure the agreement.
- If you decide not to buy the property, you will lose the option fee and possibly the down payment and any equity in the property.
Lease Purchase Agreement
- With a lease-purchase agreement, you are contractually obligated to purchase the property at the end of the lease.
- If you do not qualify for a mortgage, can't get a mortgage large enough to cover the house value, or decide not to purchase the property, you will be at risk of legal action.
Recommendation: avoid lease purchase if possible. Things can change, including your financial situation, and this agreement can put you at too much risk.
What are the pros and cons of rent-to-own for buyers?
Pros of rent-to-own homes for buyers
- Rent-to-own agreements offer a way to secure a dream property without needing the down payment upfront.
- Renters have a chance to improve their credit rating or increase earnings to expand their borrowing potential and secure a bigger mortgage.
Cons of rent-to-own homes for buyers
- With both lease options and lease purchase agreements, if you don't buy the property at the end, you will lose your option fee and - depending on your contract - potentially your down payment and equity too.
- If the property value decreases across the rental period, you may have to purchase it for more than it is now worth.
Is rent-to-own a scam?
A rent-to-own agreement is a legitimate way to secure your dream home before you can afford a down payment. it's still important to do your research and ensure the terms and conditions of the agreement are clear.
Is it cheaper to rent or own a house?
Renting can sometimes be cheaper because maintenance costs usually fall on the landlord. However, owning a home has many benefits as an investment; property value can increase, and home ownership is often looked at as a means for providing financial stability for yourself and possibly future generations of your family.
Does rent-to-own hurt your credit?
Landlords don't typically report to bureaus so rent-to-own agreements won't have an impact on your credit score. However, what they can do is help you to save for a down payment.
Can I rent-to-own a home with bad credit?
You might be able to find a landlord who will agree to a rent-to--own property agreement with bad credit, but you'll still need to improve your score to get a mortgage with a traditional lender.
Can I renovate a rent-to-own house?
Renovating a rent-to-own house depends on the terms of the contract. It is recommended that you agree to renovation terms with the landlord before signing your agreement.
Can an owner back out of a rent-to-own contract?
Once both parties have signed, they are legally obliged to follow the terms of the contract. It is therefore unlikely that either party can back out of the agreement.
Who takes care of home maintenance?
The contract will typically specify who is responsible for maintenance. Usually, the landlord provides access to heat, running water, and a habitable structure. Some leases, however, will require the tenant to repair small issues such as a leaking toilet, or will ask them to carry out household tasks like mowing the lawn.
Who pays the property taxes?
The property owner pays property taxes. A potential buyer does not pay for this expense until the lease ends and they become the homeowner.
Rent-to-own houses are a great option for those looking to get on the property ladder but need a little more time to build a solid financial record. With some research and a strategy, finding the right property can become a dream come true. Keep a positive outlook, and remember that ZeroDown is here to help you. Check out rent to own homes near you.