Rent-to-own is a real estate contract that allows the renter to buy a property they rent over a designated period through regular monthly rent payments. While this is not a traditional way to purchase a home, more and more people are looking into this option as an alternative path to homeownership. If you are considering a rent-to-own NJ real estate property, there are some things you should keep in mind. Here are the pros and cons of renting-to-own.
Pro: You can skip the wait for financing approval.
Rent-to-own can be a popular option for those with one or two things holding them back from securing a traditional mortgage. For example, maybe your credit score isn't quite there yet, or you don't have the savings for a down payment and closing costs. When you rent-to-own, you can move in now and work out the funding for the final purchase price later—all while you work on building equity in the home.
Pro: You can walk away once the lease ends with a lease-option agreement.
If you negotiate a lease-option agreement, you can ultimately choose to walk away from the home at the end of the lease if you decide the house isn't what you want. You can take the time during the lease to get to know the home, the neighborhood, and the surrounding area to see if you like it enough to invest in homeownership. This flexibility doesn't lock you into a total commitment to a property.
Con: You aren't guaranteed financing after the lease term is up.
If you are using a rent-to-own agreement to buy the time to secure financing for your final purchase, you could just be kicking the issue down the road only to have the same problem later. If you cannot improve your finances or you fall into deeper financial trouble, you will not have the financing to purchase the home even if you want to. You have to be sure you can afford to make the monthly rent payments AND save for the sales price at the end of the lease.
Con: You could lose a lot of money.
With fees, rent credits, repairs, and higher than average rent prices, you could lose money in the deal, especially if you do not purchase the home at the end. You could get hit with more fees if you agreed to a lease-purchase agreement and cannot get approved for a mortgage. The owner could also face financial difficulties and lose the home to foreclosure, which could endanger your ability to purchase it. A strong contract can mitigate these problems, so it is crucial to involve a lawyer in these deals.
There are a few categories of people rent-to-own can work for, including those who:
- Want to try homeownership without a significant investment
- Are feeling out a new city or neighborhood
- Cannot currently afford the down payment or have poor credit
- Have nontraditional source(s) of income
A rent-to-own arrangement could work for you even if you aren't in one of these situations. But if you do not fit into one of the above categories and some of the cons mentioned above seem concerning, this process may not be right for you.
No matter what kind of real estate deal you are working towards, getting the expert legal advice of an experienced real estate attorney before you sign can ensure you are protecting your assets. Veitengruber Law can review real estate contracts to help you achieve your real estate goals - no matter what they may be!