A Rent to Own Guide

Why Some RTO Agreements Fail

Folger_headshot2"While Rent-to-Own agreements offer a number of advantages to both buyers and sellers, there are certainly instances when these transactions don't work out." Jean Folger writes. Jean is a technical analyst, system researcher, and author of several books on investment. We reached out to her to get her insights on the potential difficulties and necessary safeguards associated with Rent-to-Own reality. "Often," she writes, "it's because the buyer can't get approved for a mortgage at the end of the lease, but it could be anything else: from the tenant getting evicted for not properly maintaining the property, to the seller missing mortgage payments and losing the home during the rental period. Lots of things can go wrong with a Rent-to-Own transaction." Because of this, she advocates preparedness and protecting yourself whether you're the buyer or the seller. "Make sure they understand every detail of the agreement, and adequately protect themselves with proper insurance. And, as a seller, it's a good idea to keep an eye on the property so you can respond quickly to any problems."

Protecting yourself goes beyond simply understanding the process and studying your lease, however. "As a tenant-buyer, you already have a lot of money invested in the property," Jean writes. "Making sure you'll get approved for a mortgage is hugely important–and takes some work." The legwork done by the tenant-buyer makes all the difference between success and the potential for investment loss. "During the rental period, it's important to work on improving your credit score. That means checking the number periodically (and fixing any errors), making full and on-time payments, paying down debt, and making smart spending choices. You'll also want to make plans to save for a down payment."

Jean emphasizes the importance of finding the right loan for you, rather than just securing any mortgage that you can find. "When it comes time to get the mortgage, shop around. Various lenders offer different terms and interest rates, which make a big difference in the amount you'll pay each month, and overall over the life of the mortgage." Tenant-buyers should always have the loan in the front of their mind, even before signing a lease-option agreement. Knowing your limits and staying within a reasonable price range is very important for your long-term success. "Be realistic about what you can afford," Jean writes, "and don't get into a house if you know you won't get approval or know you can't save enough for a down payment. Mortgage approval doesn't happen magically - you have to make it happen by improving your credit score, saving for a down payment, making wise spending decisions, and being realistic about what you can afford."

You can find out more about Jean Folger at her website. She is the author of several books on investing and trading, and a frequent contributor to Investopedia and Futures magazine. Thank you, Jean!