“Why rent when you can build equity?” is the usual refrain when talking with homeowners and would-be homeowners.

While there’s still plenty of value left in the old saw, the truth is the best home mortgages are out of reach for many people. And with all of the recent factors lining up to make home ownership more of a challenge than ever before, some would-be buyers may need to get creative if they want to move into a home.

Enter rent-to-own.

With a rent-to-own property, a portion of your rent goes towards the option of buying it at a later date. So, on the surface, it seems like the perfect blend of renting and paying a mortgage. Right? Let’s find out.

The Contract

Rent-to-own properties have two contracts: the rental agreement and the purchase option.

The rental agreement will likely be whatever is standard for your area. Pets or no pets, no loud noises after 10:00 p.m., etc.

The lease option will usually be for as long as your rental agreement is—typically two or three years—and gives you the option to purchase the home at a set price without worrying about losing out to another deeper-pocketed buyer.

Some important things to note here:

1. Rent-to-own agreements include an option fee which can vary from 2 – 7.5% of the purchase price and is due in full at the start. If you buy the house, the fee is put towards its purchase. If you don’t buy the house, though, you lose the money.
2. Make sure you get a lease option and not a lease purchase. The former gives you the choice to buy; the latter requires you to buy.
3. Your rent may be higher than normal as the extra amount will go towards the purchase of the home.
4. You’ll want to settle on the final price of the home before you sign anything.
5. You will typically be responsible for fixing anything that goes wrong and providing normal upkeep and maintenance.

The Math

Let’s say you agree to a three-year rent-to-own contract on a $300,000 single-family home. The option fee is 2%, and your rent is $2300 a month, and $300 of that goes towards buying the home.

36 months later you’ve accumulated $10,800 ($300 x 36 months) plus the initial $6000 from the option fee (2% of $300,000) for a total $16,800. That’s 5.5% of the total value of the home. (But don’t forget: the homeowner keeps all of this if you opt not to buy the house.)

Finding Rent-to-Own Homes

There are pay-to-use sites such as IRentToOwn and HousingList, but the best places to start are Craigslist (search for “rent to own”) and hunting down homes that have been on the market for a while and contacting the owners directly. If the seller has already moved into a new house and is paying two mortgages, they may be more amenable to non-traditional deals.

Caveat Emptor

Rent-to-own contracts can be quite complex, and scams are not unheard of.

Definitely consult with a real estate professional for guidance on the language and the terms, and also to figure out the best plan for the coming years to help prepare you to purchase the home.

Rent-to-Own May Be the Right Choice if…

• Scraping together a down payment or getting your credit score high enough in less than a year is a no-go. You’ll get the time to do both while also being able to put some sweat equity into improving your home.
• You’re in a rising market, and you want to lock in a lower price than you would pay in a few years.
• You know you’re going to be living and working in the same area for several years.
• You think your financial situation will be better in a few years and buying the house after you’ve knocked $10,000 or more dollars off will be easy.

Rent-to-Own May Not Be the Right Choice if…

• You’re not sure you’re going to be staying in the area for at least as long as the rental agreement.
• You think your financial prospects will be improving fast enough that you’ll want to move up to a bigger house right away.
• You’re not sure you can swing the extra rent and may be at risk of eviction.
• You don’t take the time to improve your credit score and financial status. Even with money applied to the purchase, you still might not qualify for a mortgage you can afford.
• You’re in a market that’s at risk of declining. In the example above, if your home lost 10% of its value in three years, that’s $30,000 you overpaid.
• You’re not sure of your landlord’s financial shape. If they fail to pay their mortgage, you could be out both your money and your home.
• You don’t think you can abide by all of the rules in the rental agreement. Paying your rent late means you lose that months credit. Breaking any of the rules—no pets, no long-staying guests, etc.—could get you evicted and forfeit your option fee.
• You can qualify for an FHA loan. FHA loans require only 3.5% down and a credit score of at least 580 for first-time home buyers. There are some other requirements and costs such as mortgage insurance, but you should first look into whether you can qualify for one of these loans.

The Bottom Line

Ultimately, rent-to-own is not for the faint of heart or the lacking in discipline. If, however, you’re committed to being a homeowner and no other options are available to you, rent-to-own may be just your ticket.