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Drawbacks of Rent to Own Real Estate

by Steve Lander, studioD

Rent-to-own real estate sounds like a great deal. The promise that if you make your monthly rental payments, someday you can become a home owner is attractive to many tenants. However, the realities of renting to own are less idyllic. Renting to own a house with a lease purchase option is usually more expensive than renting and, in some cases, you might not ever end up owning the house.

Risk of Loss

Just because you make your monthly rent payments doesn't mean that you will end up buying the house. Your lease may have conditions that invalidate your right to purchase, such as cancelling your option if you make your rent payments late. You might also end up moving before you're ready to buy the house, or you just might decide not to buy it. In any of these cases, the extra money that you paid for the lease option will be wasted.

No Tax Deductions

When you own a house, you get to write off your mortgage interest, your property taxes and sometimes your private mortgage insurance. If you're a tenant, though, you don't get any of those tax write-offs, although some states may offer you a renter's credit on your state taxes. In fact, while you're leasing to own the property, your landlord is enjoying the tax deductions on the home.

Exposure to Owner

When you rent-to-own a home, your interest in the home is dependent on the seller. In many cases, the seller uses your rent to pay his mortgage. If they, instead, pocket your rent and don't pay the mortgage, the house could end up being foreclosed on. Since the bank's interest in the property predates yours, you can lose your right to buy the property, lose your right to occupy the property and you will probably lose any extra money that you paid towards the house's value.

Getting a Mortgage

Most rent-to-own arrangements eventually end with you getting a mortgage from a lender to buy the property. However, many borrowers choose to lease to own because they cannot qualify for a mortgage. If your credit improves while you are leasing to own, this won't be a problem. If it doesn't, though, you won't be able to get a loan, you won't be able to buy the house, and you'll lose the extra money that you paid.

About the Author

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.

Photo Credits

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