Buy the house you currently rent
If you’re renting a home and particularly like the property and neighborhood, it’s natural to dream about owning the house outright and staying put for the foreseeable future. The trouble is, you don’t want to remain a renter forever. So why not consider making an offer to your landlord to purchase the home?
There are multiple ways this can be done. You might go the traditional route, by working up a purchase agreement and getting a mainstream mortgage loan. Or you and your landlord might agree on an alternative arrangement, like a purchase option or seller financing. Here’s what you should know about your options and how the process works.
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Can I buy the house I'm renting from my landlord?
If you’re interested in buying the home you rent, start by asking your landlord about the possibility of buying from them. There is no law that prohibits you from inquiring about a sale, and you probably won’t offend or anger your landlord by asking. Better yet, if the property is already listed for sale, you could be a great candidate for purchasing the home. After all, you are already familiar with it and hopefully on good terms with the landlord/seller.
“It’s possible to attempt to purchase a rental home from your landlord if the property is not listed for sale,” notes James Anderson, CEO of Veritas Buyers in Huntsville, Alabama. “You can try to make an offer on a home, but the landlord may not be willing to sell. If you are interested in purchasing, you should speak to the landlord about your interest and try to negotiate a purchase price.”
Three ways to buy a house from your landlord
There are three common ways tenants can buy a rental home from their landlord.
1. Buy the home outright
The first option is the most straightforward. If you want to buy the rental home from your landlord and finance it with a traditional mortgage, you can simply make an offer. This is easiest if the house is already on the market but might work even if the landlord isn’t actively looking to sell.
“This would be similar to purchasing any other home in the market, but hopefully without the hassle of needing to go through real estate agents,” says Anthony Martin, founder and CEO of Choice Mutual and member of the Forbes Financial Council.
Buying your rental home outright means making an offer and negotiating the transaction directly with the landlord/owner. Or, if the home is already listed for sale, it means working through real estate agents to come to an agreement and complete the transaction. Keep in mind that this could mean competing against other potential buyers who are putting in offers.
The best time to attempt a rental home purchase from your landlord is typically when the lease is up for renewal. “At this point, you can approach the landlord and express your interest in purchasing the property,” advises Joshua Haley, founder of Moving Astute.
2. Explore a purchase option
Another strategy is to arrange a purchase option with your landlord, preferably when you sign (or re-sign) the lease. “Here, you have no obligation to purchase the house and will be given an opportunity to decide if you wish to at an agreed-upon time,” adds Martin.
This might be an alternative option if you want to buy the home you rent but your landlord isn’t ready to sell. “If the landlord is not interested in selling, you can try renegotiating the lease to include an option to purchase. This will give you the right of refusal if the landlord decides to sell the property in the future,” adds Haley.
3. Rent-to-own agreements
A third option is to enter a rent-to-own agreement with your landlord. “With this arrangement, you and your landlord structure a transaction where you pay a certain amount above market rent. That amount will be credited toward a purchase, but only if you ultimately buy the property,” says Bruce Ailion, an Atlanta-based Realtor and attorney.
In essence, a rent-to-own agreement allows you to build equity in a home you already occupy as a tenant without needing a mortgage loan.
However, rent-to-own agreements can be risky. If you decide not to buy the home later on, your landlord may get to keep all the “extra” rent that would have been credited toward your down payment. And these agreements don’t come with the consumer protections that mainstream mortgages do. So it’s worth exploring a more traditional purchase route before turning to a rent-to-own agreement.
Mortgage options when buying a house from your landlord
If you’re buying the home outright — rather than using a purchase option or rent-to-own agreement — you’ll likely need financing. This can be done with a traditional mortgage loan or, in some cases, with a home loan provided by the seller. The latter is known as “seller financing.”
While a traditional mortgage is typically safer and more affordable than seller financing, not everyone will qualify. And there are select scenarios where seller financing could be a better alternative.
Using a mortgage loan
“A standard home purchase almost always involves a mortgage loan provided by a third party, such as a bank, credit union, or mortgage lender,” says Martin Orefice, CEO of Rent To Own Labs.
If you’re going the traditional purchase route, you can apply for any mainstream mortgage program. The right loan type for you will depend on your credit score, down payment, and other factors. You can explore home loan options here.
Using seller financing
Seller financing, on the other hand, involves the landlord/owner providing the funding directly to the tenant/buyer. It does not involve any third-party outside lender.
“It will often function much like a mortgage loan in that a down payment is usually required, an interest rate is charged, and a repayment term is given. But the exact terms of the financing are up to the two parties, and there aren’t as many protections for either party if the deal falls through,” Orefice adds.
Ailion points out that the owner may be amenable to offering financing because there is a payment history and comfort level with you. “It’s possible that the owner may also accept a lower down payment than a bank would require,” he says.
Also, owner financing permits both parties to save on closing costs, which can equate to 2% to 5% of the home’s total price.
“Owner financing can be a great idea when the interest rate the seller wants to charge is lower than the market rate and the terms are favorable to the buyer. For example, if the market rate is 7%, and the seller is offering owner financing at 5%, the buyer would be better off taking the owner financing,” suggests Haley.
Steps to buy the house you're renting
Are you planning to make your landlord an offer on the home you rent? Here’s what the home buying process will look like, and what steps you should expect to take:
- Check your financing options. Get a mortgage loan preapproval from a preferred lender. “This will give you an idea of how much money you will be able to borrow for the purchase,” says Haley
- Make an offer on the rental property. Work through a real estate agent to submit a formal offer if the rental home is already listed for sale. If not, contact the landlord and make an offer directly. “Become educated about the home’s market value to negotiate a reasonable or even favorable transaction,” recommends Ailion. “It’s probably best to work with a Realtor who can represent you, assist you in determining value, and perhaps negotiate the sale, including writing the sales agreement”
- Agree on terms of the sale. Include the purchase price, any requested renovations or repairs, and a timeline for the transaction. These details should be put in writing in the form of a purchase contract that a real estate attorney should review
- Order a home inspection. Have the property professionally inspected by an experienced home inspector to make sure there are no hidden defaults you’ll have to pay to repair once you take ownership
- Get homeowners insurance. This will be required if you’re using a mortgage loan
- Close the deal. You’ll sign your mortgage papers on closing day, pay the down payment and closing costs, obtain the deed, and take possession of the property
Ultimately, if you’re buying the home with a traditional purchase agreement, this process looks much like it would for any other home buyer.
Understanding rent-to-own homes
It’s important to understand that rent-to-own agreements are not the same thing as buying a home outright or even using seller financing. These arrangements come with their own special rules and risks.
Orefice says many landlords will only be interested in selling a property to a tenant via rent-to-own agreements. He explains, “In most rent-to-own agreements, the first step involves paying a one-time option fee at the start of your lease. This will be between 1% and 5% of the home’s value and is usually nonrefundable. This is essentially a down payment that allows you to commit to buying the home at some point during the term of your lease.”
He continues, “Once the option has been invoked, tenants will generally continue to pay rent on the property. However, all the rent they pay from this point forward, and often all or some of the rent they paid up to this point, will count toward the ultimate purchase of the home.”
A lease with a rent-to-own agreement in place typically lasts for one to three years, during which time the tenant has the right to occupy the property but does not own it. “At the end of the lease, the lessee may purchase the home for a predetermined price or may choose not to purchase it and move out,” says Anderson.
Be aware that there are some risks associated with rent-to-own arrangements.
“For the tenant, there is always the risk that the landlord could default on the agreement or that the property could be sold to someone else before the lease term is up,” cautions Haley. “For the landlord, there is the possibility the tenant could damage the property or not make their monthly payments on time.”
Furthermore, in a rent-to-own situation, you usually pay a higher rent than you would for a similar home you do not intend to purchase. And if you decline to buy the house at the conclusion of the lease, you may have to forfeit any equity you’ve built up in the property.
“Also, if the housing market declines during the lease period, you may be stuck with a home worth less than the purchase price,” Anderson warns.
Your next steps
If you’re hoping to buy the home you currently rent, talk to your landlord about a traditional purchase agreement. When you buy a home outright, you can typically use a traditional mortgage loan. This will be safer and cheaper, in most cases, than alternative options like rent-to-own agreements.
As a first step, work closely with a mortgage lender to get preapproved and find out how much you can afford to pay. This will help you make a realistic offer to your landlord and prove that you can afford financing to secure the home.