Landlords love rent-to-own deals because they're almost guaranteed to win. If you don't buy the property, the landlord frequently gets a profit on the sale. If you don't buy it, he gets to pocket your money. Along the way, you'll end of paying a bigger lump sum in the beginning than you would have for a rental. You'll also wind up paying more every month than you would have for a rental, and you'll have no real guarantees.
Renting to own isn't cheap. Most landlords will ask you to put between 3 and 10 percent of the house's eventual purchase price down and pay an above-market rent. They ask you to do this so they can collect a market rent and also have extra money to apply toward the final price. In essence, they're serving as your savings account. Then again, you might be able to buy a house with lower payments.
Limited Landlord Services
Many landlords will treat you as an owner once you start the rent-to-own arrangement. That sounds good, but it can leave you with more responsibility than you would have had as a regular tenant. Depending on the lease, you could end up paying for repairs or utilities usually handled by the landlord. Some leases even make you pay the property taxes while you're a tenant.
Landlord Retains Ownership
The deal doesn't change the fact that it's still the landlord's house. This means if anything happens to your landlord, or if she fails to fulfill any of her obligations, you could lose your right to buy the house and your investment. Problems can arise in many different ways. Let's say the owner fails to pay her mortgage, stops paying property taxes or even suffers an unrelated financial problem, like a lawsuit or bankruptcy. In any of those cases, you could be left high and dry.
Getting a Mortgage
Many people look at this arrangement because they can't get a mortgage at the time they sign the lease. If your credit improves while you're doing it, this won't be a problem. When your option comes up, you can take your new, higher, credit score to a lender, get a mortgage, and buy your home once and for all. If your credit doesn't improve, or doesn't improve enough, you could still end up unable to get a mortgage. If your option expires, you'll lose all of your money.
Loss of Money
Ultimately, the biggest problem is you're giving the landlord extra money he can hold and doesn't have to give back. Whether you can't buy the property, can't get a mortgage, or don't want to buy it, you'll lose your money. Given that it's not uncommon for rent-to-own investors to take back more houses than they sell, there's a real risk that you're just throwing away your money.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.