Who Pays For Repairs In A Rent To Own Agreement

Owning a home is many a renter's dream. Information technology's a goal that can take years of scrimping and saving to squirrel abroad a downwards payment — not to mention the careful spending and meticulous bill-paying required to go on your credit score loftier.

In the meantime, you lot're withal paying rent, peradventure even more than each month than y'all'd pay for a mortgage payment. But what if a portion of your rent were going toward purchasing your rental home at a later date?

That'south exactly the dream that rent-to-own deals are selling, but what'due south the catch with rent-to-own homes?

A person looking at a rent to own contract for a home. — Source: (Shopify Partners / Burst)

Rent-to-ain nuts: Crediting rent toward a future purchase

Too known as a lease-purchase agreement, a rent-to-own contract is an agreement between the tenant and the homeowner stipulating that a portion of the monthly rent is credited toward the future purchase of the belongings.

Then, when the lease ends — typically within 1 to five years — you've saved up a credit with the homeowner that finer serves equally your downwards payment.

Sounds ideal, right?

A hire-to-own deal means you can starting time paying toward a home purchase even if you can't technically qualify for a mortgage yet.

"Most people considering a rent-to-own purchase either don't have a high enough income or good plenty credit to buy a house right at present," says experienced Washington state amanuensis Hao Dang, who'southward sold over 76% more properties in the Seattle area than the boilerplate amanuensis.

But renting-to-own isn't quite so cut-and-dried. There may be boosted fees paid to the seller that will non count toward either your rent or your down payment, and y'all could also be on the hook for maintenance and repairs from the 24-hour interval you motility in — but nosotros'll get into more of all of that shortly.

Is renting-to-own actually a good idea?

These deals carry a risk for both heir-apparent and seller, only renting-to-ain can brand sense if the deal is structured properly. And considering rent-to-own agreements tend to occur organically — they by and large aren't listed and marketed in the same way as conventional sales or rental offers — special terms tin often be written in from the outset.

"Information technology's more of a 1-on-one deal based on the personal circumstances of both parties," says Rick Fuller, a meridian agent in the San Francisco Bay Area.

Fuller explains that, in his marketplace, rent-to-ain agreements normally arise when a landlord is interested in selling their house old in the time to come, and they happen to meet a tenant who is interested in buying but still needs a little fourth dimension to save upward their down payment or raise their credit score. In short: a rent-to-own bargain makes the almost sense when it's going to be a win-win for both parties.

Summer Rylander, a HomeLight contributor who sold her own South Carolina home through a rent-to-ain understanding a few years ago, agrees.

"My house needed meaning updates that I merely didn't have the cash for, and my tenant was eager to buy in the neighborhood, only she needed time to ameliorate her credit history and didn't mind an imperfect holding," Rylander explains.

In this instance, a rent-to-ain agreement made sense because both parties clearly stood to benefit from the arrangement — and they were willing to be patient with ane some other.

These types of deals tin be packaged very differently, however.

A charter-choice versus a charter-purchase understanding

Lease-purchase and lease-choice may audio similar, just in that location's one very big deviation: i is a requirement and the other is a choice.

A lease-purchase, or a rent-to-own agreement, legally binds you lot to purchasing the home one time the lease is up
A charter-choice gives you the opportunity to buy the house before the lease is up

Yes, lease-purchase and lease-option contracts are both types of hire-to-ain agreements, and while each can exist risky as a buyer, a charter-option at least offers you an out if you later make up one's mind the home isn't actually for you.

Choosing not to exercise your purchase option volition almost certainly effect in the loss of your selection money — that's the fee y'all would have either paid as a lump sum up-forepart, or paid towards each calendar month with your rent payment — only you won't be on the hook to commit to endmost on a home you no longer want.

With a lease-purchase or rent-to-own understanding, yous do have an obligation to buy the dwelling house.

Money used for a rent to own home — Source: (Shopify Partners / Flare-up)

The real risks of hire-to-own contracts for buyers

Hire-to-ain contracts (of the charter-purchase variety) may audio good on newspaper, but you shouldn't sign one without advisedly considering the drawbacks, too.

Let's review several possible pain points you should consider before signing a hire-to-own or lease-purchase agreement.

one. Yous'll probably pay more in rent every calendar month than yous would as a renter

Permit'southward face it — landlords aren't going to credit a portion of your monthly rent toward the purchase of the house out of the goodness of their hearts. They'll expect something in render.

This "take hold of" is usually more than per month in rent than yous'd pay in a simple rental organization. And non all of that "extra" you're paying each month is going toward your purchase credit.

For example, permit'south say the standard rent for a property is $one,700 a month, but the landlord is offering a rent-to-own bargain for $2,000 a calendar month. Don't expect to be credited for the whole $300 extra you're paying each month.

In the fine impress of this deal, it could turn out that you lot'll be credited merely $200 of that $300 each month. So, in reality, you lot're paying this landlord $100 simply to "save" coin for yous.

Simply it may be helpful to shift perspective and think of this as a convenience fee because few homeowners volition cull to delay the auction of their home past a year or more when they could otherwise probably close in 30 days once their house is under contract — particularly during a hot seller'southward market, where y'all're unlikely to be the only interested heir-apparent.

two. You're paying less toward the price of the house than you'd recollect

Putting several hundred dollars a month toward the purchase of a house earlier you tin can actually afford a mortgage sounds like a smart financial move on the surface.

Simply when you run the numbers, yous'll come across that the sum full of the credit doesn't actually amount to much, even in the long run.

"Information technology's but similar leasing a machine. If you actually pay off and purchase a leased car, you've paid a lot more than if y'all'd simply purchased the car outright," explains Dang.

Let's say you're paying $2,000 a month in a hire-to-own bargain on a $400,000 domicile — and the landlord agrees to put $200 a calendar month (or 10% of your hire) toward the price of the house.

That's only $2,400 in one year.

In five years (the maximum of well-nigh lease-purchase agreements), that's a total of only $12,000 that'll be credited against the agreed-on purchase price.

And y'all could pay that much just to get into the deal in the first place, because…

three. Most rent-to-ain contracts require a nonrefundable upfront fee

Certain, renters wait to pay fees to lease an apartment or business firm for things similar security deposits and application fees — sometimes as much equally two-months' hire.

But if yous're opting for a rent-to-ain bargain, expect to experience a piddling sticker shock.

Most charter-purchase agreements require an upfront, nonrefundable, ane-time fee that'due south calculated by the dwelling house valuation. While the amount is negotiable, information technology'due south typically between 2.5% to 7% of the agreed-upon purchase toll.

Exercise the math, and you'll encounter that you're paying anywhere from $10,000 to $28,000 (on a $400,000 house) just to get into the rent-to-ain deal.

That may be around the same or double what you'll pay again in closing costs when yous eventually go a mortgage on the firm.

For instance, if y'all go a thirty-year, fixed-rate mortgage for $380,000 (later making a $20,000 or 5% down payment on that $400,000 home), you'll pay around $12,000 in closing costs in Phoenix, AZ, co-ordinate to Banking company of America'south endmost costs reckoner.

Alternatively, you could salvage the upfront fees you'll pay on a hire-to-ain deal, put that money in a savings account — or better yet, a mutual fund — and allow it earn interest so you tin can beget to purchase a home sooner than you could in a hire-to-own bargain.

4. You may lock in at a bad valuation

Like the cost of gas, home values are constantly fluctuating. Sure, it's true that, historically, home values increase over time considering information technology's an affectionate asset.

Nevertheless, in the short term, list prices rise and fall by thousands of dollars within the span of weeks or months.

That tin can be a problem with the rent-to-own because most charter-purchase contracts state the agreed-upon sales price of the home in the contract. In other words, you're locking in the price of the home ane to 5 years before yous buy information technology.

"It is possible for a rent-to-ain contract to just ready a purchase price range, merely typically, you're negotiating and locking in the cost of the firm long before you lot actually buy it," explains Dang.

"If the property value has decreased when it comes time to purchase the house, the tenant is still locked in to pay the higher cost."

If the domicile value does decrease below the agreed-on purchase toll, be prepared to lose the money you earned as a credit toward the purchase toll. You're likely to meet appraisement problems, and no bank is going to sign off on a mortgage for more money than the house is actually worth. So, unless y'all're able to cover the difference, you won't exist able to purchase the property when your rent-to-own contract is up.

Alternatively, the value of the home could increment during your lease period — keen news for you, but non exactly enticing for the seller. For this reason, finding a landlord who will agree to a rent-to-ain purchase in the midst of a seller's market as frenzied equally 2022 and 2022 take been may exist extremely challenging.

five. You lot're on the hook for repairs to the business firm

Non only are landlords unlikely to make a profit-free rent-to-own bargain, they're also not thrilled about dumping coin into fixing up a home they plan on selling soon.

Unlike standard rental contracts, the grab with almost rent-to-own agreements is that they include conditions that say the tenant pays for all repairs and maintenance to the belongings.

This puts the responsibility for repairs and upkeep on you.

"I definitely stipulated that my tenant was responsible for maintenance and repairs as before long as she moved in," says Rylander. "I wanted her to feel as though the home were hers from day one."

(While hire-to-ain contracts practice vary by country and could potentially put the responsibleness for repairs on the actual homeowner, don't count on it.)

At showtime glance, that seems similar a reasonable system. After all, you're planning to own the home in the about future, so you're probably happy to pay to accept repairs done to your satisfaction.

However, this is a risky move, considering at that place'southward no guarantee that the bargain will go through as planned.

What's actually happening when the hot water tank bursts, the appliances break down, or the furnace fails, is that you're paying to replace those items in a home you lot don't legally own nonetheless.

"Information technology's non an ideal scenario," admits Rylander. "Though my tenant and I both readily agreed to these terms, the advice I would give a rent-to-own buyer today is to exist wary if you're looking at a house that needs work. Repairs or improvements are a lot to take on for a belongings that isn't technically yours, and you don't desire to feel resentful before you've even fabricated it to the closing table."

Furthermore, if you default on the lease, y'all may not be able to purchase the house — so you lot'll lose the rental credit money and every penny spent making repairs and abode improvements.

And it's surprisingly easy to default on a hire-to-own agreement.

6. Late or missed payments for any reason could kill the deal

When y'all're late with your rent in a standard rental agreement, the worst you lot're looking at is a steep late fee (unless you're a repeat offender and eviction is on the table).

No biggie, correct?

If it's a one-fourth dimension situation due to unavoidable circumstances and you're otherwise a stellar example of a pay-on-time tenant, then one late payment won't practice much harm. Your landlord may even exist and then understanding equally to waive the late fees.

Honestly, a rent-to-own landlord may be that understanding, besides. Withal, fifty-fifty if they are understanding and waive the tardily fees, read the fine impress on your agreement very carefully, because a late payment may all the same void the rent-to-ain contract.

And it's not merely late payments that are an issue. There's a long list of scenarios that can trigger a default in a rent-to-ain contract, such as violating a "no pets" clause, or failure to make required repairs in a timely fashion.

Even if y'all're a perfect tenant who'due south followed the contract to the letter, at that place's still a chance the rent-to-own understanding could be voided.

Let'southward say yous can't afford to buy the house, or you fail to secure a mortgage, when the lease is up — don't expect a refund. Failure to make skilful on the purchase nullifies the lease and that rental percent credit you earned vanishes.

vii. The hire-to-own setup is vulnerable to scams and shady landlords

As the tenant, you take on most of the chance in a hire-to-own contract.

You're the one who is (probably) paying more than necessary in rent each month, with the promise that the owner will credit the amount toward the purchase price someday. And you're the ane trusting that the money you spend on repairs is going into a domicile y'all'll own someday.

Your landlord has very little adventure because they remain the owner of the home throughout the charter. If you default, they get to go on the house and all the money you've paid.

That beingness said, selling a domicile through a hire-to-own arrangement is likely not your landlord's hole-and-corner retirement plan.

"Honestly, I was stressed every month waiting on the rent check," says Rylander. "I still had a mortgage payment to make, whether my tenant paid on time or not. People like to make a villain out of landlords, only sometimes we're genuinely just 1 person with one property, trying to brand ends meet simply like you — not every rental scenario is profit-driven."

Yet, the financial jeopardy you put yourself in is serious enough that the Federal Trade Commission issued a report that rent-to-own agreements can be shady deals and downright scams.

According to the consumer information report, defrauded rent-to-own tenants have establish out also late that:

The landlord can't legally sell the business firm considering they don't actually own it
The seller leaves you with several years of unpaid property taxes
The firm is in disrepair, or has hidden problems like lead or asbestos
Promised fixes aren't fabricated after a contract is signed
The house is headed for or in foreclosure

Should you autumn victim to one of these scams and an unscrupulous landlord, then at best you'll accept an unpaid tax bill. At worst, you'll have spent years thinking you're paying downwards the price of a home that you'll never be able to purchase.

In Michigan, top Battle Creek-based agent Cassie Scramlin warns that there is no real mode to know for sure that your landlord is making payments on the home. And even if the foreclosure procedure begins, you're still on the hook for your own rental payments as agreed.

"It's important to understand that [in Michigan] you're bound legally past that lease-purchase or hire-to-own agreement to make your payments, regardless of whether or not the seller is making theirs," says Scramlin.

She advises would-be buyers to work with an experienced agent and exercise due diligence to make sure they have the best possible chance of successfully purchasing the home. Scramlin encourages buyers to ask sellers for a title policy search to understand right away if there are any liens, tax issues, or other problems that could delay or prevent a sale.

A door in a home that is rent to own. — Source: (Rafaela Biazi / Unsplash)

8. And that'southward non all…

In addition to the significant risks and inconveniences of rent-to-ain agreements, further drawbacks may include:

Difficulty finding a home

Every bit mentioned before, it can be tough to find a seller willing to enter a rent-to-ain understanding. When the real estate market place is in favor of sellers and available homes are limited, in that location's simply picayune motivation for a homeowner to delay the sale of their home in social club to let you hire information technology first.

Choices may exist express

Even if you notice a willing seller, in that location's a limit to the types of homes that might exist offered every bit rent-to-ain. If y'all're looking for a luxury belongings, for example, it's unlikely to happen. The same goes for uniquely synthetic homes — if you have your eye set on one that has sustainability at the forefront of its design, you're probably not going to observe a seller offering a lease-purchase.

What if y'all don't like it?

Admittedly, this could happen fifty-fifty if you purchase a home straightaway, but what happens if yous move into a business firm on a hire-to-ain agreement and realize y'all don't actually want to own the place? You're probably not going to get back the coin that has been fix bated toward your future downward payment if yous pull out of the deal. And — again, this is where it'due south key to read the fine print on whatsoever sales or leasing contract — the seller may be able to pursue legal action for your failure to uphold your end of the agreement.

What if you can't go financing?

Even if you lot spoke with a lender before setting out to find a rent-to-own property, in that location'due south no guarantee you'll be approved for a mortgage by the time your lease is up and information technology'south fourth dimension to buy. You tin help minimize complications by carefully discussing steps to better your credit score with a mortgage lender early in the process and ensuring that you brand timely payments, just unforeseen things can certainly happen.

If you have a charter term of i, 2, or fifty-fifty three years earlier you'll be obligated to buy the home, lots tin change in terms of income, marketplace value of the property, and mortgage interest rates. Proceed with caution.

Lesser line? Do your due diligence

Rent-to-own agreements aren't automatically a bad idea — they tin exist a practiced thing for both buyer and seller — you just need to do your homework before signing on the dotted line.

Equally Fuller mentioned, an honest conversation with the seller is most likely going to be how you'll detect the possibility of a hire-to-ain or option to purchase after leasing, so use this opportunity to proceeds understanding. A homeowner who is eager to sell their home is unlikely to choose a rent-to-own understanding equally their platonic sales strategy, so if they're open up to the idea, it's fair to enquire them why.

Scramlin likewise encourages buyers to ask if a homeowner is current on their mortgage payments. While, sure, they could lie and say yes when they're actually iii months backside, most states crave posting a notice of default in the public record subsequently a certain period, then it'due south quite possible to discover out if your home-of-interest is barreling toward foreclosure.

And don't forget Scramlin's proposition to run a check on the championship of the home, which will uncover any liens due to unpaid taxes, unpaid repair companies, family grievances, property disputes, so on.

Finally, even if — mayhap especially if — the home is to exist sold every bit-is, or if you'll be responsible for the cost of maintenance and repairs during your rental period, do not skip the domicile inspection. This is your best opportunity to find out what you lot're dealing with should you choose to take on this house.

Don't forget, the drawbacks nosotros've discussed apply more often than not to lease-purchase agreements, only a lease-option contract isn't far behind. The latter could exist a good bargain for you if you negotiate well and it'due south written with your interests in mind, but information technology's non without similar pitfalls.

A person handing someone a card for a rent to own home. — Source: (Van Tay Media/ Unsplash)

So, when does a rent-to-own agreement actually make sense?

Renting-to-own might make sense for you if you know your financial situation will exist improving soon. Maybe your mortgage lender has indicated that your credit history will be in skillful shape to reassess a loan in six months, or maybe y'all've just started a new job with a stiff bacon and you know you'll be able to relieve up a down payment quickly.

Renting-to-own can offering breathing room when you've found a home y'all love merely can't become a mortgage for just however — only you shouldn't get in without a plan. Agreeing to hire for, say, three years before trying to buy leaves quite a few unknowns, and the more than unknowns at that place are, the riskier the deal.

Finally, if you're interested in purchasing the house you're renting, and your landlord offers you a rent-to-ain contract that'due south really a lease-pick agreement — don't automatically say "no."

Think, a lease-choice provides just that: an selection to buy. You may have to pay an choice fee for this privilege, simply it might exist worth the cash if you're happy in your home and would similar the run a risk to make it your own.

In either case, inquire a existent estate attorney or a top local agent with rent-to-own experience to review the contract start to determine if the lease-purchase or lease-choice is a proficient bargain for you. If it's not, another option is to simply charter a smaller, less expensive property and put the money you'll save on hire toward building a down payment for your dream home downwards the road.

Header Image Source: (Holly Stratton/ Unsplash)