Beware of the Risks of a Lease-to-Own Agreement

Lease-to-own agreements can help you purchase a home over time, but you have to be careful. These types of agreements have several risks you’ll want to understand before you sign anything.


If you’re considering a lease-to-own agreement, consider these points:


  1. Key features of agreements. Although agreements can vary, one of the key features is a contract that gives you the option to buy a home after renting it. Most agreements give you 3-5 years to exercise your option – time to raise your credit score and gather funds for a down payment.


  • Agreements usually require that the rent payments are higher than normal because of the buying option. A portion of your higher rent payments may go toward your down payment. Check the contract and include this specific provision if you want it.


  1. Financing issues. One of the biggest issues with lease-to-own agreements is that renters encounter challenges while they try to finance the homes.


  • This type of agreement doesn’t guarantee that you’ll be able to buy the house at the end of the lease. You’re still responsible for financing the mortgage, and renters often have challenges getting a loan.


  • If you’re not able to get a loan to buy the home, then you may have just wasted several years renting a property you can’t buy. You could also lose that extra money you paid that was over and above market-rate rents because, in most instances, the homeowner gets to keep that extra money you paid toward the buy option if you can’t get financing.


  1. Default issues. A lease to own agreement usually doesn’t offer any type of protection to the person who is renting the house.


  • If you default on the payments, then the owner can take over the home. In this case, you will lose all of the money you had paid to the owner.


  1. Walking away. If you decide not to buy the home at the end of the lease, again, you’ll lose all of the rental payments you made toward the down payment. In most cases, the contract doesn’t allow you to get your money back.


  • This can be a significant loss. You may be paying a much higher rate than normal for the property.


  • An unscrupulous homeowner might sell the house and break the contract. Although this is against the law, you’ll have to get a lawyer to fight back. If you’re not in a position to do this, then you could still lose all of the money you invested in the home.
  1. Illegal contracts. Some states don’t allow lease-to-own agreements for homes, so it’s crucial to check your state’s rules before you get involved. Even if the contract looks valid, you’ll still want to consult a lawyer.


  1. Maintenance and repairs. Your contract and agreement should clearly state who is responsible for the home’s maintenance or repairs.


  • The owners can’t force you to do maintenance if they’re responsible in the contract.


  • The agreement should also state if you’re allowed to do upgrades on your own. You may be able to start home projects before you buy.


A lease-to-own agreement can help you buy the home of your dreams. However, it’s important to be aware of the disadvantages before you sign paperwork.


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Tariq Thomas

Tariq Thomas is a full time real estate investor, mentor and coach who has been developing and investing in real estate for nearly two decades. He is also a licensed Realtor and is well versed in finance, economics and business development.