What Is a Rent-to-Own Agreement and Is It a Safe Way to Buy in California?

Rent-to-own deals come in a few shapes. In general, you sign a lease plus an agreement about buying the home later. Some give you the option to buy. Others require you to buy.

I'm Jeanette Nelson, a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas. Buyers who aren't quite ready for a mortgage sometimes ask me about rent-to-own. It's worth understanding exactly what you'd be agreeing to before any money changes hands.

Common pieces of these deals include:

• An upfront fee for the right to buy later
• A purchase price, set now or decided later
• Monthly payments, sometimes higher than regular rent, with part possibly credited toward the purchase
• A deadline to buy, usually tied to getting a mortgage
• Rules about repairs, which may put more on you than a normal lease

The FTC says rent-to-own home deals can be risky, and even flat-out scams. Its warnings include:

• The "seller" may not own the home.
• Property taxes may be unpaid.
• The home may be in foreclosure.
• The home may have serious problems, and promised repairs may never be made after the contract is signed.
• Missing one payment can end the deal. The FTC notes that in some deals, if you miss a payment, the deal is off.
• You may pay upfront fees and more each month than you would as a renter.
• You could end up stuck. You may be locked into paying more than the home is now worth, or be unable to qualify for a mortgage to finish buying it.

The FTC's guidance for renters also warns that deceptive rent-to-own schemes may not make clear the conditions that make it nearly impossible to actually buy the home.

If you're considering a rent-to-own deal in Orange County, take these steps before you sign or pay anything:

1. Confirm ownership. The Orange County Clerk-Recorder offers an online index of recorded property documents. A title company can also run a preliminary title report.
2. Check property taxes. The Orange County Treasurer-Tax Collector's tax bill site lets you look up a property by address or parcel number, including the status of current and prior bills.
3. Get an inspection. Hire your own licensed home inspector before you commit. My article on your first home inspection explains what's typically covered.
4. Get it in writing. The FTC advises keeping a copy of the contract and good records of every payment.
5. Have an attorney review it. Ask about what happens to your fee and credits if you can't buy, who handles repairs, and how the agreement is recorded.
6. Talk with your lender early. Ask what you'd need to qualify by the deadline.

A HUD-approved housing counselor can also help you think it through. The Consumer Financial Protection Bureau (CFPB) has a tool to find one near you.

Rent-to-own isn't the only path to owning. Depending on your situation, you might:

• Keep renting and save, while working on credit. My article on whether to keep renting or buy walks through that decision.
• Look at low down payment loans. My article on HomeReady and Home Possible explains two options.
• Explore down payment help. My article on how much to save for your first home covers costs and assistance.
• Build credit first. My article on building your credit has steps you can start today.

If you're working toward buying and want to map out a plan, I'd love to talk with you about your goals and timeline, with no pressure. Call or text me at 714.366.8575 | DRE: 01397168, or contact me. Jeanette Nelson is a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas.