Don’t rent-to-own without reading this.
- Rent-to-own homes might seem like a good idea with rising home prices.
- You can use a rent-to-own program to get into a home faster.
- Unfortunately, lease-purchase agreements carry enormous risks.
Home prices have risen dramatically in recent years, making home ownership more difficult for many potential buyers. Therefore, lease-to-own offers may seem attractive.
With a lease-to-own agreement, you typically negotiate the purchase price of a property you’re interested in and then move in. You start paying rent to live in the house, but part of your rent goes to cover your future purchase. of the property. At the end of a designated period, you can buy out the lease and it may be easier to get a mortgage since you already have the equity in the home from the lease payments you’ve made.
While this may seem like a quick and easy way to become a homeowner, financial expert Dave Ramsey cautions against this approach to buying property. In fact, on a recent show, when a caller asked about his lease-to-own property, Ramsey unequivocally stated, “Never do a lease-to-own.”
Here’s why Ramsey thinks this method of buying a home is a bad idea
On the June 24, 2022 Ramsey show, a caller asked if it would be a good idea to take out a loan to buy a rent-to-own home rather than continuing to make rent payments with some of the cash going to the main.
Ramsey explained one of the main reasons he thinks the lease-to-own transaction was the wrong way to buy a home. “The reason is that the house isn’t in your name. If the current owner gets in trouble, you lose everything. And there’s nothing you can do about it.” he said. “Let’s say the current owner was sued. This is a lien on his property. This property is not in your name, it’s in his name. You would lose all that capital.”
Ramsey urged the caller to get a loan from a credit union as soon as possible to put the house in his name, describing the situation as “very dangerous” and explaining that he was currently in a precarious position.
Ramsey also explained some additional disadvantages of rent-to-own on the Ramsey Solutions Blog. These included:
- Pay higher rent
- Pay more for fees and repairs if you are responsible for covering them
- Potentially paying more for the house than it’s worth because you lock in the purchase price early and the value of the property could drop
- Lose money if you decide not to buy the house because you’ll probably have to walk away from the contract without getting back the extra rent you paid
- Risk of losing money as rent-to-own contracts generally favor sellers
- Potential loss of equity if owner is seized or sued
However, he acknowledged that there are some benefits, including the ability to build up a down payment over time as part of your rent payments.
Is Ramsey right to move away from rent-to-own properties?
Ramsey is correct that rent-to-own is not an ideal option. If you can qualify for a mortgage and buy a home the more traditional way, that’s a better approach. The house will be in your name right away, so the equity you build in the property will be yours if you need to sell.
But a lot depends on your situation and the details of your contract. If you’re eager to buy a home and want to build equity in your rent payments – and if the contract you enter into has reasonable terms – this might be an option you want to take advantage of. Just make sure you’re aware of the risks and read the fine print so you don’t end up with a money-losing deal in the end.
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