While not terribly popular in New England because of the strong housing market, rent to owns can still be found. However, 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 of buying 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.
What is Rent to Own?
Rent to own is where a renter/buyer and a seller agree to a predetermined price where the renter has the option to purchase the house they are renting in a certain amount of time. Typical it is a one, two or three year option.
In return for the option to purchase, 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.
Typically all or part of that option fee will be converted towards a down payment should the renter exercise the option to buy.
Why Rent to Own vs Getting a Mortgage?
More often than not a renter/buyer does not have the qualifications to secure a mortgage. The rent to own option seems attractive. It allows the home buyer time to fix their credit or financial situation.
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.
Is Rent to Own a Good Way to Purchase a Home
For 98% of the folks looking to rent to own, I don’t recommend it. You are 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. Being foreclosed upon or having to file a bankruptcy can have far reaching ramifications.
I really can’t think of a great reason why any one would want to rent to own unless you were highly speculative and lock in a low price on a home now, in hopes that when you exercise the right to purchase home prices are up, due to price appreciation in the real estate market.
The Downsides of A Rent to Own Contract for a Home Buyer
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.
- If you don’t close your option fee 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.
- Your 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 a two or three years from now.
- 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.
- The rent to own contracts are usually very seller weighted. Again the seller is taking advantage of your financial situation and your want to own the home.
- Most likely you will be responsible for all repairs and 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. If you violate the terms of the lease then the option is considered null and void and you will be asked to leave.
- You will need to work diligently to fix your financial situation and depending on the issues it may not be accomplished it time to exercise the option
The Four Steps You Must Take If You Move Forward with a Rent to Own
If after all this you still want to rent to own, there are four must take steps you to take to protect yourself.
- 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 and there needs to be many specifics spelled out to protect the 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 appraisal one when your 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 what ever 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.
Final Thoughts on Rent to Own
For most people I think rent to own is a bad idea. You can’t purchase right now for a reason.
If you do purchase a home with a rent to own option, remember the devils is in the details. If you can mitigate your risk so you don’t lose your option money under certain conditions and you are not having to do a lot of repairs, a purchase option may not be the worst idea in the world if the perfect house comes along. Consider the risk and rewards.
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 your 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. 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 anyways 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 Group One Real Estate. Need help buying or selling a home? Give me a call at 978-360-0422 or email me at email@example.com
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