The not-so-secret way of renting a home while building equity

Every month when we write our rent check, we cry a little bit on the inside. Sure, we’re fortunate to have a cozy apartment where we can hang our handbag and relax with a glass of wine. But that’s pretty much all we’re getting, and we can’t help but feel a little bit stiffed. We know this is starting to sound like a “first world problem,” but hear us out.

When you rent an apartment or home, as opposed to owning one, you aren’t building equity. As in, you’re basically giving away thousands of dollars to your landlord every month so he can pay his mortgage. You’re also at the mercy of your landlord when it comes to painting the walls, hanging pictures, and owning a pet. What’s more, a rental agreement doesn’t guarantee any sort of stability – a scary thought for those who want to plant roots and feel settled.

While some folks prefer freedom to security and are satisfied with renting, others dream of buying a house of their own one day. Unfortunately, rising home prices and a still-recovering job market are making it a struggle for many hopeful homebuyers to get in the real estate game. Does this sound like you? If so, you may be a good candidate for a rent-to-own agreement.

 What is a rent-to-own agreement?

 A rent-to-own agreement is a contract that allows a renter to lease a property and, at the end of her lease, have the option to buy it at a predetermined price. Though the lease agreement usually runs between one and three years, the buyer can purchase the home at any point during the term of the contract.

 How does it work?

Before entering a rent-to-own agreement, the buyer and seller will negotiate the monthly rent and sale price. A portion of each month’s rent goes towards a down payment to eventually buy the home. It’s important to remember that once the buyer and seller sign an agreement, the sale price of the house is locked in. This means that even if the housing market fluctuates during the rental term, the original agreed-upon sale price is final.

 Are there any fees involved?

Of course, no sweet deal comes without some strings attached. In addition to her monthly rent payment, the buyer will have to pay a one-time option fee. Paying an option fee gives the buyer the option of purchasing the house at the end of her lease, at which time the money becomes part of the down payment. But that’s not all. The buyer also has to pay a monthly rent premium, which is subtracted from the purchase price of the house at the end of the lease.

 Is a rent-to-own agreement right for me?

A rent-to-own agreement is a great option for hopeful homebuyers who want to own a house but haven’t been able to save enough money for a down payment. This type of agreement is also ideal for those with a lack of assets or credit and who need a few years to work on improving their finances.

 Anything else I should know?

It’s important to hire an experienced real estate agent to guide you through a rent-to-own agreement. She’ll be able to help you understand your rights and obligations while protecting your personal interests.

Photography: Nick Rochowski/Corbis

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Kate Kasbee
Kate Kasbee is a blogger and freelance copywriter living in Los Angeles. She has a background in real estate marketing and has also written about a variety of subjects including pet care, how to adopt a vegan diet, and technology. Prior to living in sunny California, Kate spent eight years in Chicago where she lived in nine different apartments in five different neighborhoods. Though she’s not quite done exploring, Kate dreams of planting her roots and owning a home with creaky floors and plenty of land for starting an organic farm.
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