Richard Stevens is an active real estate investor with over 8 years of industry experience. He specializes in researching topics that appeal to real estate investors and building calculators that can help property investors understand the expected costs and returns when executing real estate deals.
A mortgage is one of the most popular ways to finance a home. However, many home buyers fail to meet the stringent lending requirements associated with mortgages. Rent-to-own and owner-financing are two alternatives you can choose from to purchase a home. Although they are similar in numerous ways, it’s unbelievably easy to confuse one from the other. Both solutions offer a viable solution for people with bad credit to own a home, even with their significant differences.
We’re going to look at a rent-to-own vs owner financing comparison to help you understand better and pick an option that suits you best.
A rent-to-own contract provides a renter with the option to continue renting a property while providing them with the choice of buying the same property at a specified time in the future. It’s an excellent option if you have a bad credit score or lack enough funds to purchase a home upfront.
The buyer is typically allowed 1 to 3 years to pay the agreed amount in full. Although the renter has the option of buying the home at a later date, they are not obligated to make the purchase, either. In this type of agreement, the seller retains full property rights until the renter keeps their part of the agreement in full.
In an owner-financing agreement, the home transfer happens at the beginning, where the buyer automatically becomes the new owner of the property. The agreement allows the buyer to pay the previous owner in installments that can extend to several years.
With owner financing, the buyer continues paying for a transaction that has already happened, unlike in a rent-to-own contract where the buyer makes payments to a hypothetical purchase that might never materialize.
In a rent-to-own home agreement, the buyer rents the property for a specified period until they can find a way to purchase the home (either in cash or a loan from a lender). Transfer of ownership happens after the fulfillment of the contract. In an owner financing contract, the seller provides the buyer with a home loan, which gets paid in monthly installments until the whole amount is completed. Transfer of ownership takes place at the beginning of the contract.
Given that in a rent-to-own setting the buyer remains a tenant until the home’s payment is completed, the seller retains all the rights and responsibilities of homeownership, including repairs. In an owner financing situation, transfer of ownership occurs at the beginning. Thus, the buyer assumes full rights and obligations of the home, including repairs.
Buyers of rent-to-own arrangements don’t have the option of selling the property to avoid foreclosure since they don’t own the home. Also, deposits made in rent-to-own agreements are non-refundable if a default occurs. In owner financing agreements, the buyer can sell the property to counter default, where they would retain the property’s equity, which is subject to the sale price.