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If you are interested in becoming a property owner, you may have heard of rent-to-own properties. Basically, with a rent-to-own property, you enter into an agreement with the current owner. You pay a set amount for rent, which is generally more than the market rate. Then, some of that money is put into building equity in the home.
After a certain period of time, when your lease ends, you have the option to buy the home by paying the remaining amount due on it minus equity you’ve acquired. Ideally, this will enable you to more easily qualify for a mortgage because you already have equity in the house and won’t need to make a large down payment.
While this may sound like an ideal way to become a homeowner, finance expert Dave Ramsey has some concerns about the process. Specifically, he has explained that you could face a big added cost in a rent-to-own agreement. Here’s why.
According to Ramsey, one of the biggest issues with rent-to-own arrangements is that you could end up on the hook for a lot of added expenses you may not have planned for — and that could end up making the rental payments you’re making a lot more costly.
“In rent-to-own agreements, the seller may require you to cover random costs like home repairs and maintenance, homeowners association (HOA) fees and property taxes while you’re renting,” the Ramsey Solutions blog warns. “That means you could find yourself on the hook for everything from landscaping fees to repairing a broken air-conditioning unit. Ouch!”
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In a more traditional rental arrangement where you haven’t signed a lease-to-own agreement, your landlord typically takes care of these things for you. If something goes wrong at the house, you just call your landlord and they handle and pay for repairs. If property taxes go up or HOA fees increase, your landlord also foots the bill (although theoretically they could pass on some of the added costs by raising your rent at the end of your lease — but you’d have the option to not renew).
If your rent-to-own agreement specifies that you are responsible for these things, then you end up having to shell out your own cash even if you aren’t the official legal owner of the home yet. If something goes wrong and you decide not to go through with the purchase, you’re out all of the money you spent repairing the landlord’s house and paying the landlord’s property taxes.
Should you consider a rent-to-own home anyway?
The added costs of maintenance and repairs are not reason enough alone to avoid rent-to-own properties — although this is one of several reasons this arrangement may end up being a bad deal for you in the end.
But if you decide a rent-to-own approach is the right choice for you, you should make sure to understand what your financial responsibilities are. You may be able to negotiate in your agreement for your landlord to continue covering some or all of these costs. And, if you can’t, at least you’ll be prepared for them so they won’t bust your budget.
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