This blog post explains the history of rent-to-own home programs, how the concept works, and how it has evolved into the 21st century.
If you are 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. In this post, we explore that history, explain what rent to own really means, and 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, as it pertains to the housing industry, generally means an agreement between a property owner and a tenant. The difference between a typical rental agreement and a rent-to-own agreement is that the tenant has the right to eventually purchase the home.
While the actual requirements of these contracts can vary, there is usually some action that the tenant is supposed to take in order 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.
As we discuss below, these types of agreements have in some cases been 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 has been used to defraud people and lure them into predatory housing situations. According to The Atlantic, this type of abuse was prevalent in the middle of the twentieth century in some American cities. And sadly, it also continues today.
In a comprehensive 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 goes on to quote 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 that some rent-to-own agreements can be beneficial. So how can you tell the difference?
Rent to Own: How to Tell if It is Legitimate
There are a few factors that make a rent-to-own agreement legitimate and not predatory. Below, we list the factors which must be present for such an agreement to be legitimate:
- 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 have purchased it outright and they are 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 that the renter must pay a certain amount over a specific period of time in order 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 within 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 have to 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 that are designated as going toward the future purchase of the home on behalf of the renter 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. In cases where 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 recent years, companies like Divvy have brought innovative new business models to the market that improve upon 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:
- You put in 1-2% of the value of the home as a down payment.
- You choose a home you like from among all the homes 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 for up to 3 years.
- Every month, you make a monthly payment to Divvy that includes an equity savings portion (typically about 25% of the payment).
- At the end of 3 years, you would have saved up 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.