If you’re in the market for a new home and just happened to come across the term “rent to own,” it might not mean anything to you. At its most basic, the phrase means exactly what it says: you rent a property with the intention of owning it later. But this term has a complicated history and different meanings depending on the context. Here, we help you figure out the difference between a scam and a legitimate rent to own home.
What does “rent to own” mean?
Rent to own is generally an agreement between a property owner and a tenant. The difference between rental and rent-to-own agreements is that the tenant has the right to eventually purchase the home.
The requirements of these contracts can vary, but usually the tenant needs to take some action to secure their right to purchase the home. The term “rent to own” itself refers to any such agreement. But as in every type of contract, the details matter a lot.
Historically, these types of agreements were used in a fraudulent and even discriminatory manner. However, in an ideal scenario they can help renters become homeowners.
The history of rent to own
The phrase “rent to own” has a long and complicated history. Unfortunately, in some cases it was used to defraud people and lure them into predatory housing situations. According to The Atlantic, this type of abuse was prevalent in the mid-20th century in some American cities. And sadly, it also continues today.
In an article titled “A House You Can Buy, But Never Own,” author Alana Samuels writes: “In the 1950s and 1960s, African Americans were prohibited from borrowing through traditional means, so they entered into contract-for-deed arrangements, which left them with little equity to pass on to their children.”
That article also quotes Beryl Satter, a history professor at Rutgers University–Newark, who says, “It was bad in the mid-20th century, but it is even worse now… the housing is in way worse shape, the markups are grotesque, and these people have been through multiple forms of credit exploitation, which is partially why they’re in this market.”
There are multiple problems with a predatory rent-to-own arrangement like the ones mentioned above. But we know some rent-to-own agreements can be beneficial. So how can you tell the difference?
Rent to own: how to tell if a program is legitimate
There are a few factors that make a rent-to-own agreement legitimate and not predatory. As a guide, these are the indicators you should look for when evaluating a rent-to-own program:
- It must be clear who owns the home. The most predatory arrangements are the contract for deed scams, where the person who moves into the home believes they’ve purchased it outright and they’re not aware that the seller retains the deed. Before entering into a rent-to-own agreement, make sure you understand who will own the home and what is required for a change of ownership.
- It must be clear what actions the renter must take to eventually own the home. Some agreements state the renter must pay a certain amount over a specific period of time to get ownership of the home. The renter may also be required to avoid any major damage to the property. As long as these terms are made clear in the contract and are understood by the renter, this is generally an acceptable practice.
- It must have transparent terms, including fees. The contract signed by the renter should clearly explain any fees or other payments that will be required before moving in and/or taking ownership of the home. There should be no hidden or undisclosed fees and no ambiguity in the contract.
- Maintenance costs must be paid by the owner. The renter should not pay for major maintenance or repairs until they become the full owner of the property.
- Monthly savings payments made by the renter must not be taken. Any payments made by the renter going toward the future purchase of the home should be kept in a separate account and should be returned to the renter, minus any transaction fees, when they purchase the home or move out.
- Appreciation of the home’s value must be factored in. If the renter is making recurring payments that go toward the future purchase of the home, the contract should explicitly state who benefits from any appreciation in the home’s value while the renter occupies the home.
New approaches to rent to own
In the last few years, companies like Divvy brought innovative new programs to the market that offer a new take on the traditional rent-to-own model.
Divvy was started in 2017 to give people a bridge to homeownership. Here’s an example of how Divvy’s program works for a prospective home buyer:
- Complete a free application for Divvy’s program to see if you qualify.
- You put in 1-2% of the value of the home as an initial “home savings” contribution. We’ll get to what that means in a minute!
- You choose a home you like from almost any move-in ready home on the market.
- Divvy buys the home of your choice with an all-cash offer.
- You get to move into the home and live in it while you save up to buy it within 3 years.
- Every month, you make a monthly payment to Divvy—about 25% of your payment goes into “home savings,” money that you’ll build each month that can be used toward your future down payment.
- At the end of 3 years, you’ll have saved up 5% to 10% of the home’s value and can purchase the home from Divvy at a previously-agreed price.
The best part of this new rent-to-own concept is it places a lot of control into the customer’s hands. As the customer, you know what purchase price you can buy the home from Divvy and at what time. You also know that your savings are growing each month, which will help you purchase the home at a later date.
Divvy was founded by entrepreneurs with expertise in finance who wanted to make a better way for Americans to save up and become homeowners.