Rent-to-Own Deals: Usually Good for Sellers, Bad for Buyers
Additionally, many times the “rent” is above the comparable market rent. So market rent might be $1,500 but you are paying $1,800 with that additional rent to be credited (termed “rent credit”) for your downpayment. But if you aren’t able to purchase for any reason, including the chance you can’t secure bank financing, you don’t get that extra rent credit money back. So the seller keeps it. You lose.
Of course, all terms are 100% negotiable, so if you try one of these R2O deals, feel free to negotiate all terms to your advantage, and good luck.
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I know people want to own real estate to earn wealth, and I’m the biggest proponent ever, since this can be a great way to earn long-term wealth. But doing a rent-to-own deal is unlikely to increase your wealth and more likely to end up costing you money via forfeits of those additional rent downpayment when you move out.
Oh, did I forget? It’s estimated that only about 10% or less of renters in R2O deals actually are able to close the purchase. So at the end of the day, you’ve paid above market rent to someone else. I’m sure they appreciated your increasing their net wealth? But for you, the better route would have been leasing a normal rental and saving money. That’s a more solid strategy for building wealth.
If you want to earn wealth on real estate, you need to buy that near-perfect property for all the right reasons — which is because you want to own real estate for a long time. That’s my philosophy, and it should be yours, too!
Leonard Baron, MBA, CPA, is a San Diego State University Lecturer, a Zillow Blogger, the author of several books including “Real Estate Ownership, Investment and Due Diligence 101 – A Smarter Way to Buy Real Estate.” Read useful tips for real estate buyers in his blog, Making Smart and Safe Real Estate Decisions. See more at ProfessorBaron.com.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.
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