A Simple Guide to Buying the House You Rent

Here's what you need to know.
Written by Meg Stefanac
Written by Meg Stefanac

Financial blogger and business owner, Meg Stefanac, has more than 15 years experience working in the financial services industry and enjoys helping individuals make solid financial decisions. Meg has extensive experience writing about insurance and finances and is a key contributor to TrustedChoice.com.

A family walks into their rented home.

When Lisa Sanford accepted a job in post-Katrina New Orleans, she was not entirely sure how long she would be staying. She and her husband sold their Birmingham, AL home and began renting a house in Gretna, LA. After a few years, the couple was certain that they wanted to live there long-term and they ended up buying the house they’d been living in.

If you are currently renting a house and want to stay in it long-term, you may want to do something similar to what Lisa Sanford did.  Home ownership will enable you to start building equity while also permitting you to make and enjoy improvements to the property. Furthermore, although your property taxes may fluctuate a bit, you will no longer need to be concerned about annual rent increases.

So how do you go about making the transition from renter to owner? The process of buying the house you rent begins with one important step: talking to the home owner. But first, make sure you're covered with an affordable home insurance policy.

Talk to the Home Owner

In some cases, landlords approach their renters. If they are planning to sell the property anyway, they may give their tenants the opportunity to purchase the house before they list it. In such a case, the home owner will likely already have a purchase plan in mind, and you will then have to decide if you are interested.

Otherwise, you will need to contact the property owner and express your interest in purchasing the house. It is not always easy to convince them, so you may have to come up with a creative and compelling argument as to why making the sale would be in their best interest.  This is what Lisa Sanford had to do.

“My landlord did not readily accept my offer to buy the house,” states Sanford, “I had to coax him by explaining that I was buying regardless of his decision. He considered the difficulty of preparing the home for a new renter and realized that he would not be able to collect the same rental charges, since post-Katrina prices had normalized. I had to guide him to the decision using those factors.”

Regardless of who makes an offer first, if your landlord is agreeable to making a sale, you may be able to go about making the transition from renter to owner in one of three ways.

Option #1: Purchase the House Immediately

If you and your landlord agree on a purchase price and you are able to qualify for a mortgage, you may be able to set about buying the house immediately.  In such a case, your landlord will most likely not employ the services of a real estate agent, which means that you will need to treat this as a For Sale By Owner purchase. Enlisting the services of a real estate attorney can help you be sure that the transaction runs smoothly. 

Amy Fontinelle of Investopedia recommends that you look at other similar properties that are for sale in the same neighborhood or ask to have the house appraised before you agree on a purchase price in order to ensure that you are not being asked to pay too much. Feel free to negotiate.

Before you jump into a deal like this, be sure that you are fully aware of what your monthly costs will be as a mortgage holder. Remember, in addition to the mortgage principal and interest, you will now be responsible for paying school taxes and other property-based taxes as well as homeowners insurance premiums, which are significantly more expensive than renters insurance premiums. 

Be sure to compare the full cost of home ownership to your current rent payments to make sure that you will not be overwhelmed financially. In some situations your monthly payments may actually be lower than your rent payments, in which case, you are entering into a good deal.


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Option #2: Enter into a Rent-to-Own Agreement

A rent-to-own agreement is a good idea if you do not yet have sufficient money saved up for a down payment. When you enter into a rent-to-own agreement, you will start paying your landlord an additional sum of money each month and this money will go into an escrow account to be used as a down payment after a specified amount of time, typically three to five years. 

Rent-to-own agreements should always be made in writing. Katherine Lewis of MSN Real Estate recommends that both parties work with a real estate attorney when drawing up the agreement contract.

The downside to rent-to-own agreements is that if circumstances in your life change and you no longer wish to purchase the house, the home owner will be able to keep all the money that you paid toward the down payment. Additionally, if you are unable to qualify for a mortgage after the designated time period, you will also forfeit your down payment money to the landlord. 

Lewis warns “Before you consider a rent-to-own agreement, make sure you understand the possible pitfalls. One misstep and your dream of home ownership could go up in smoke.”

Option #3: Enter into a Lease-Option Agreement

A lease-option agreement is similar to a rent-to-own agreement with one major difference:  You are under no obligation to buy the property. With a lease-option agreement, you will have a legal option to purchase the property at an agreed-upon price after a given period of time.  

“This affords more flexibility in case your circumstances change, as circumstances are wont to do,” writes Steve McLinden of Bankrate. As with the rent-to-own option, lease-option agreements should always be made in writing. Oral agreements are never binding.

Enjoy the Benefits of Home Ownership

We believe that everyone should have the opportunity to own their own home, and we wish you the best of luck in your endeavor. If you end up buying the house you rent, you may want to speak to a local agent to discuss the insurance implications. 

These agents can not only help you find affordable homeowners insurance, they can also help you review any other insurance policies you carry to ensure that you are not paying too much. Frequently, policy discounts are available to home owners, so don’t miss out on these savings.

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