While rent-to-own programs can be a great fit for some people, it all depends on what’s in the contract. 

So, you’re interested in a rent-to-own program? That probably means you are an aspiring home buyer who has been declined for a mortgage or who simply needs a little more time to save up for a down payment or improve your credit score. 

While it makes sense to look at rent-to-own programs as an alternative to a mortgage, you should be cautious about what you’re signing up for. Continue reading to learn about the pros and cons of rent-to-own and how to decide if it’s right for you.

How Rent-to-Own Works 

The basic idea behind rent-to-own, sometimes referred to as lease-to-own, is that you can live in the home for an agreed-upon period of time and also use your monthly rent payments to eventually save up to buy the home from its owner. 

While this sounds simple on the surface, it can become very complicated very quickly. For example, you may have questions such as:

• What portion of your monthly payment actually goes toward the purchase of the home?
• How long will it take you to buy the home?
• Are there any loopholes that would allow the owner to keep the home and keep the money you’ve already paid? 

This complexity is why you need to understand the pros and cons before you enter into any rent-to-own agreement. Read more about how the rent-to-own process works.

Cons of Rent-to-Own 

Let’s start with the possible disadvantages or drawbacks of a rent-to-own agreement. Historically, these agreements have sometimes been used to defraud unsuspecting people with unfair contract terms that make it almost impossible to purchase the home. There is also a history of “contract for deed” arrangements that were used to defraud Black people in the 1950s and 1960s under the guise of providing them with a way to buy a home. You can read more about this history in our blog post about how to find legitimate rent-to-own programs. 

The bottom line is that you should be extremely cautious about any program that has the following characteristics: 

• Promises without evidence: If the seller makes lofty promises without any evidence that they will follow through, that is a red flag. Any contract that includes a promise of homeownership with no actual mechanism for taking ownership of the home should not be signed. 
• Confusing contracts: If the rent-to-own agreement does not have clearly spelled out terms, including a detailed accounting of who pays which fees, and when the ownership of the home will be transferred, that is a red flag. 
• Unfair costs or fees: If the contract includes unfair fees or costs, such as requiring the renter to pay for all maintenance costs, that is a red flag. 

Beyond these important considerations, you should also think about whether you are a good fit for a rent-to-own program.

• Your timeline: Are you willing to wait to become a homeowner? Most often, a rent-to-own program will take many months or several years to put you in a position to own the home. If you’re not prepared to wait, that could be a problem.
• Your ability to pay: If you feel there’s a high likelihood that you won’t be able to make the monthly payments that are required, a rent-to-own program may not be right for you. That’s because if you fail to make your payments, not only could you lose your opportunity to own the home, you could also lose some of your savings.

If you’re still interested after hearing the potential cons of rent-to-own programs, you’ll be glad to know that there are some rent-to-own programs that are not only fair, but that give renters a good opportunity to become homeowners. Below, we’ll examine what that looks like. 

Pros of Rent-to-Own

If you structure a rent-to-own program the right way, it can be a powerful way to become a homeowner. Remember, any program that is trustworthy should have full transparency into the terms of the agreement as well as a track record of satisfied homeowners who can verify that the program worked as intended. 

At Divvy Homes, we’ve created what we call an “enlightened rent-to-own” program. Here are the characteristics of Divvy that make it fair to our customers: 

• Before moving into the home, our customer puts in 1-2% of the value of the home as an initial payment. This money becomes part of their down payment on the home if they choose to buy it later.  
• Our customer can choose a home they like from among homes currently on the market This gives them plenty of choice in which home they end up living in and potentially owning.
• Divvy buys the home for our customer with an all-cash offer. We are the owner of the home and our customer rents the home from us. As such, we pay for any major maintenance costs that are necessary to make the home livable. 
• Every month, our customer makes a monthly payment to Divvy that includes a savings portion (typically about 25% of the payment). This savings portion goes toward the down payment on the home if they choose to buy it from Divvy. 
• Our customer gets to move into the home and live in it for up to 3 years. At the end of 3 years of making monthly payments, they would have saved up 5-10% of the home’s value and can use this money for a down payment to purchase the home. 
• We give our customers a pre-agreed price at which they can purchase the home from Divvy after either 18 months or 3 years. 

The points above are some of the many pros of a rent-to-own program like Divvy. There are real benefits to such a program, because it can give you a way to become a homeowner within just 3 years. You know exactly what you’re getting into before signing the contract. Learn more about Divvy and how our program works.

Conclusion 

For anyone considering rent-to-own, or lease-to-own, as an option, it is very important to know the pros and cons of this type of program. There are some predatory or fraudulent companies that use the term “rent-to-own” as a way to scam people who aspire to own a home. If you are considering a rent-to-own program, you need to know the signs so you can avoid these scams no matter what. That means steering clear of any arrangement with a confusing contract, unfair costs and fees, and promises that cannot be verified. 

Instead, be cautious and discerning. Do your research and only sign a contract with a company that has a track record of satisfied customers, plus transparent terms and low fees. You should be able to know exactly what you’re getting into before signing any contract.