The Difference Between the Rent to Own Strategy and Seller Financing

I’ve recently received a question on this topic on my Instagram page so I decided to dedicate an entire blog post to it. It’s very common for beginner real estate investors to confuse these two strategies, as they are quite similar in broad terms. However, there is a major difference that distinguishes the rent to own strategy from seller financing, which I will explain below! 

These two strategies fall into the category of creative real estate financing that can allow you to get your hands on a property without having a lot of cash sitting at the bank. Most simply put, the rent to own strategy allows buyers to “test-drive” a property before actually buying it. They get to live in the property before it gets transferred to their name. Seller financing, on the other hand, allows them to purchase a property right away even without using a bank.

What is Rent to Own?

Some renters give people the opportunity to live in their properties with the option to purchase them some time in the future. While living in the property, you are still renting it and paying a monthly fee whereas the landlord remains the real owner of the home. You as the renter have the option to purchase the property at one point in time, although you’re not obligated to do so. With the rent to own strategy, you will be signing a lease-purchase agreement. 

This contract specifies the current sale price of the property, the amount of rent that goes toward that sale price each month, and the amount of time the buyer can spend renting the unit before buying it. Overall, this strategy gives you more time to secure financing for the property, which is great if you find a unit you’re interested in but you cannot close the deal right away because of financing reasons.

Keep in mind that rent to own agreements usually require quite a big down payment. Because of the benefits that this strategy provides, the renter requires the buyer to make a down payment that is usually higher than a standard security deposit. Even the monthly rent is typically higher than traditional rent you would be paying if you were to sign a regular tenancy agreement.

What is Owner Financing? 

Unlike with the rent to own strategy, seller financing means the property ownership gets transferred from the owner to the buyer right away. Upon closing the deal, you become the new owner of the property without any “test-driving” or probation periods. The only difference between a traditional purchase and a seller financing purchase is that the current owner of the property acts like a bank by offering financing to the seller. 

With the rent to own strategy, you are paying monthly rent that may or may not apply to a purchase at the end of the lease. With seller financing, you have to pay off the loan after the purchase is completed, which is the major difference between these two strategies. This is a great option for people who have bad credit or do not qualify for a conventional mortgage for one reason or another. 

Similarly to the rent to own strategy, the owner financing strategy usually requires the buyer to provide a down payment. However, in this case, the down payment is lower than the payment that mortgage companies require. Moreover, it is mandatory for the owner and the buyer to sign a mortgage agreement that includes terms such as loans, interest rates, monthly payments, and all the necessary clauses.

Which Strategy is the Best Option for You? 

Now you’re probably wondering which option is the best fit for you. That depends on what is stopping you from purchasing an income property. If you’re in need of more time to come up with a financing solution but you don’t want to lose out on an opportunity, the rent to own deal is the right fit for you.

However, if you’d like to take over the ownership of the property right away but you don’t want to or cannot go through a bank for financing, then the seller financing strategy could be a good solution. The great thing about both strategies is that they allow people to invest in real estate properties even with bad credit or no mortgage capabilities.