While not terribly popular in New England because of the strong housing market, rent to own homes can still be found. I probably get several calls a month from a hopeful home buyer looking for a home they can lease to own. The rent to own or lease option gives the hope to many to buy a home instead of renting forever.
You will find where the real estate market is languishing and houses are sitting on the market, lease or rent to own options will be much greater. When you buy a home as a rent to own, it allows the potential sale of a home while the landlord covers costs waiting for you to perform on the purchase. As well, allowing the home buyer to accrue a down payment and improve their credit to allow them to get a conventional mortgage.
How Rent To Own Works?
Rent to own is where a renter/buyer and a seller agree to a predetermined price where the buyer rents a house and has the option to purchase the house they are renting before the lease runs out. Typically it is a one, two or three year option to buy in the rent to own contract.
In return for the option to purchase the home, the renter pays an agreed upon option fee usually in the arena of 20% of the rent. So if the rent is $2000 a month you would be paying an additional $400 dollars a month in option fees.
The option fee will be converted towards a down payment should the renter exercise the option to buy.
Why Would A Seller Rent To Own?
Rent to own homes rise when the real estate market softens and it is harder for a seller to secure a buyer. In tough a tough buyer’s market a seller could opt to rent to own their house to open up to a larger pool of buyers.
Why Rent To Own vs Getting a Mortgage?
More often than not a renter/buyer does not have the proper qualifications to secure a mortgage. It could be a homebuyer has bad credit, their debt to income ratio is to high, they have not worked a job long enough, etc…
The rent to own the house option seems attractive. It allows the home buyer time to fix their credit or other situations that may prevent a borrower from getting approved for a mortgage.
Usually, the renter/buyer has a credit score that is too low to purchase a home or their credit may be fine but they need to pull a down payment and closing costs together.
It is also an option for people who may not be fully committed to buying but want to keep their options open. A renter can “test drive a home” before buying. Or, in case of a relocation, a renter is waiting to see if a job contract will convert to a full-time position.
Is Renting to Own House a Good Way to Purchase A Home?
For 98% of the folks looking to rent to own, I implore you to think carefully.
You are probably looking at renting to own for all the wrong reasons. The reason you can’t get a mortgage is exactly the reason you should not rent to own. Impulse! Control it.
Take the time to fix your fico score and purchase a home with a traditional mortgage product. Don’t put the cart before the horse.
I certainly do not want to discourage someone to purchase a home with an option to buy, but understand the road ahead of you.
The Advantages Of Renting A Home With An Option To Buy
- Secure A Purchase Price- Renting to own a home allows you to secure a purchase price. if prices rise, great! If prices fall then you have the option to back out.
- Test Drive The Home: Buying a home through a rent to own contract allows you to test drive a home. Not only do you have time to see if the home is a good fit, but you also get a chance to find out if the neighborhood and the surrounding are right for your family. This can be a good option for relo’s who know nothing about the area.
- Move less: A home that is rent to own is great for a buyer who is committed to purchase and want to set roots in a community. The rental period in a rent to own contract allows a buyer the time to pull the purchase together.
- Build equity: Often there is a premium paid in a rent to own contract. The premium often goes toward the purchase price which creates automatic savings to go towards a downpayment.
The Disadvantages of A Rent To Own Home
Usually there are many downsides to getting into a rent to own contract. All of the rent to own contracts I have seen benefit the seller and puts the buyer at risk of losing a serious amount of money if they don’t perform on the option to buy.
- Your Option Premium Is Wasted. Yep, if you decide not to close or can’t close your option fee is non-refundable. Your landlord received market rent and then some.
- You’re Locked Into A Purchase Price. This can go either way for you, home prices in your area can go up or down. But, it is very hard to predict where home prices will be two or three years from now.
- It May Benefit The Seller More Than You. Think about why the seller is willing to get into a lease to own contract. They could just sell it today and be done with it. In my experience, they can’t sell their home for what they want and they are leveraging your poor financial situation.
- Rent to own contracts are very seller weighted Rent to own homes usually attract disadvantaged buyers that can’t secure a mortgage right now. It puts the seller in an advantageous position.
- You will be responsible for all the maintenance Unlike a rental the thought is that you are the one that benefits from repairs in the future and you are responsible. And, if you don’t exercise your purchase options you leave all the repairs and upgrades for the landlord.
- You still have the lease terms to abide by Until you purchase the property you have the terms of the lease to abide by. If you violate the terms of the rent to own lease then the option is considered null and void and you will be asked to leave or evicted.
The Devil Is In The Details Of The Rent To Own Contract
Everything in a rent own contract is negotiable. Do not get involved in a contract to purchase a rent to own house without the contract being a win-win for both buyer and seller. Here are a few points to consider when a contract on a lease to own option is drawn up.
- Hire an attorney. Have an attorney review the rent to own contract so that he can spell out the downsides for you and possibly negotiate better terms. Local attorney Rick Carter of Carter Law points out there are many grey areas that can arise in a rent to own contract. There needs to be many specifics spelled out to protect the renter/buyer.
- Do a Home Inspection. A home inspector will point out current deficiencies in the home as well as short term maintenance that could be around the corner. Negotiate any home repairs just like you do with a purchase. You expect a house to be delivered safe, healthy and with all systems and structures functioning and serviceable.
- Get an appraisal. An appraisal will confirm that you are paying a fair market price for the house. Just like when a bank finances a mortgage they confirm the value with an appraisal. If the home does not appraise for the purchase price you should consider walking away. I would suggest two appraisals, one when you sign the rent to own contract and make the option contingent on the property appraising at or above the purchase price when you exercise the option.
- Make sure that whatever is preventing you from buying today will be corrected when the option to buy comes around. Talk to your credit repair people or your mortgage broker. You will need to be diligent to correct the problem.
- Understand the downside of the contract you are entering into. Unfortunately, there are going to be downsides for a buyer in a rent to own contract. Make sure you can live with those downsides.
Find Rent To Own Homes
Finding affordable homes for rent to own can be tough. Especially in hot markets like you find in the Greater Boston area of Massachusetts. A seller can easily sell a home without the hassle of rent to own.
- Network- Talk to friends and family about your desire to find a rent to own home. They may know a landlord/seller that may consider that option.
- Have your agent reach out to other agents– A real estate agent can quickly blast out they are seeking a rent town situation for a buyer. While most homes listed in the MLS are sellers that just want to sell, there might be a seller who has struggled to sell their home and would consider it as an option.
- Hit Up For Sale By Owners- You may have a better chance of working with a home that is being sold as a for sale by owner.
- Talk to landlords- A landlord that has been considering selling but isn’t fully committed might just consider a lease with an option to buy.
Is Buying A Rent To Own A Good Idea?
I don’t want to be a Debbie Downer but, for most people, I think buying a rent to own home is a bad idea.
For most seeking a rent to own home, you probably can’t purchase with a traditional mortgage for a reason.
The downsides are the rent to own contract can give the seller all the advantages and you the disadvantages. At the end of the day, you can spend a lot of extra money and lose it because you don’t buy the house in the end.
If you do purchase a home with a rent to own option, remember the devils is in the details (or the rent to own contract). Mitigate your risk so you don’t lose your option money under certain conditions.
Consider the risk and rewards carefully when considering looking at homes for rent to own. Double-check your motivations and make sure the situation makes sense.
Absolutely hire an attorney, like Rick Carter that has rent to own experience. Many of the downsides of a rent to own contract may be negotiated away if you and the seller can meet somewhere in the middle.
Otherwise, try and correct the problem that is preventing you from buying first, then purchase. A rent to own contract hastily signed could put you in a no-win situation where you feel you’re forced to buy even though you are not ready or you lose all your repairs and option fees.
Correcting your credit can be far easier than you think and maybe a better route to go. I have seen drastic changes in credit scores in just 6 months. Working with a good mortgage broker and possibly a reputable credit repair company, your credit will be on the road to recovery in no time.
As far as saving for a down payment? Just take a savings account and add 20% of your rent into that account every month that is what you are doing anyway with a rent to own! You can buy a house for as little as 3-5% down with very competitive interest rates. A $300,000 home the down payment can be as little as $9,000 to $15,000. There are still some No Money Down Loan Programs available but are not available to a large pool of buyers.
If you want to explore financing options or work on your credit give me a call, I will set you up with the right professionals to get you buying in no time.
Other Related Real Estate Resources:
- Luke Skar- Buy a Home With 0% Financing
- Teresa Cowart- Is a Purchase Option Right for Me
- Bill Gassett- Fixing Credit Report Errors
- Paul Sian- 7 Thing to do Before Purchasing a Home
This article about Is Rent to Own A good Way to Purchase a House? is written by Kevin Vitali of EXIT Realty. Need help buying or selling a home? Give me a call at 978-360-0422 or email me at firstname.lastname@example.org
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