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In today's economy we are seeing many people change from homeowners back to tenants, seeking quality homes to rent long term, or in some cases looking for homes to lease with the option to buy in the future.  Not quite an owner, but more than a renter, a lease-to-own agreement is a bit like a housing purgatory.

But this arrangement is increasing in popularity because sellers are having trouble finding a buyer in this real estate recession, and plenty of buyers cannot get a mortgage due to the cut back in lending practices. 

Through a rent-to-own contract, a renter locks in the right to buy a home at a later date at a set price.  The renter puts down a nonrefundable deposit, and sometimes part of the monthly rent goes toward the downpayment.

There are pros and cons on both sides.  These agreements can help a seller get through a slow market with a little cash in the pocket, however, the seller must agree on a set price when the market is at its lowest point, not to mention getting a bad tenant that may ruin the deal.  Renters can potentially build home equity immediately even though they are not ready to buy, but must be assured that when the commitment is due, they can get mortgage financing and this could be a real challenge. 

The arrangement in itself is complicated.  It is a combination of a purchase and rental agreement.  Both parties should go into it with help from a real estate attorney who will write the lease-purchase agreement.  To start, the renter and seller agree on a fair price for the home.  In this market, a renter could lose out if the home declines in value before it can be purchased.  Or, the seller can get the short end if home prices begin to appreciate more than expected.

In addition to set price, the deposit, monthly payment, and any other options, there are many important conditions that should be outlined in the agreement:

Can the terms be extended if the renter cannot buy at the set time?  If so, for how long, and should the renter be required to increase the deposit?

What happens if the renter falls behind on the monthly payments?

Who pays for the maintenance and repairs of the house?

The eventual buyer should be ready for a vetting process that mirrors most rental applications.  Sellers should always run credit checks and get income and employment verifications.  Renters should treat the agreement like they are buying a house.  It is wise to get an appraisal and home inspection, as well as to check into the seller's mortgage status.

A lease-purchase agreement is not for everyone.  For those not financially ready to buy a home, it is better not to rent-to-own.  It is wiser to wait a few years, create a financial plan, clean up credit issues, and save some cash each month for a downpayment.  Do not jump into purchase agreements without fully understanding the financial considerations and consequences.