With rent to own it’s important to understand all of the risks. One important risk facing all homeowners and rent to own clients is unfavourable market conditions. Another question you should be asking is “what happens if the market doesn’t appreciate as expected?”
With a rent to own program, the client has the option, but not the obligation to purchase their home. So, if prices decline too much, the client can choose not to exercise their option and simply walk away from their option fee and credits, and there are no strings attached.
However, in a flat or slow market the tenant may still wish to exercise their option to purchase the home based on the idea that they love living in that home and that it will continue to appreciate in the future. The problem here is that if the market has not appreciated as much as expected the client may not get the value they need on an appraisal to obtain the mortgage they need to purchase the home at the pre-determined option price.
At this point, there are a few options for the client. They can either add funds to the deal to make it work or try to negotiate with the investor for a lower purchase price, some seller financing, or an extension on their rent to own program.
The truth is that market conditions do present a risk for rent to own clients just like a regular homeowner, but having the option to walk away in a down market is a benefit over traditional home ownership. In a flat or slow market investors are often willing to co-operate to find a win-win solution since they are usually investing for strong cash flow and prefer not to sell a home that hasn’t appreciated.