January 5, 2017 by Jeff Lowen
As a would-be, first-time homeowner, have you ever thought that a owning a home might be too large of a step for you? What about the savvy real estate agent that hears those words from a new buyer client… “Why don’t we look into a Rent-to-Own?”
If “rent to own” has ever entered your thoughts, then read on. There are pros and cons that are all over the map, depending on who you ask. Let’s see if we can break it down to something a little more simple.
First of all, it’s exactly what it sounds like. A tenant, or prospective purchaser ‘rents’ the house for awhile and then it magically becomes their own. Is that simple enough? Great! Now let’s get to the confusing stuff…
Repeat after me: Rent to own, lease purchase, purchase option, lease to own, lease with an option, lease option… Pretty much all mean the same thing. Yeah, there’s folks out there that want to split hairs and put each under a microscope, but for the sake of argument, when it comes to a sale of a house outside of the traditional arms-length transaction; anything that couples this with a lease, or rental for a period of time until something happens that changes ownership… Yeah, they all mean the same thing.
Now that’s out of the way… Let’s continue.
Renting to own, although sounds like an easy alternative to get to your homeownership goals, is almost unnecessary in the world of homeownership programs, down payment assistance programs and other venues that make the dream of owning a home easier for the current renter or first-time homebuyer.
The ‘option’ part (as it’s called a lease option/purchase option, etc.) means while you’re renting, you’ll have the ‘option’ to buy the property at some time in the future.
Are you still with me?
We can get as complicated as you like with this because the beauty of this type of buy-sell transaction has a million different scenarios and a thousand different possibilities. For example:
- Part of your rent amount each month can go towards the purchase price, in the form of what’s called a ‘rent credit.’ How much? It’s negotiable.
- Will you have a security deposit or an amount called ‘option consideration’ or both and how much is that? It’s negotiable.
- Will there be a separate lease and a document called, ‘memorandum of option?’ Will anything be recorded at the courthouse before the sale? Guess what? It’s negotiable.
- Who will do the maintenance? What if something major happens? Who will pay for it? Could the expense be shared? Yep, you guessed it: It’s negotiable.
- Do we agree on the purchase price now or what and get an appraisal when it’s buy time? How long will you have to rent before you can buy it? Of course… It’s all negotiable.
The list goes on and on. The biggest problem here is that it can get really complicated. Especially for a real estate agent that wants to sell you a home, but when you ask that magic question about rent to own, many run for the hills or gloss over it like the plague. Not because they don’t want to help. Because there is virtually none, lemme say it again, NONE, nada, zip – training in this area of study if you’re not in the investor world, and then you’ll learn how to make money from lease options/rent to own properties.
As a landlord/seller, the worst case scenario is when the tenant doesn’t purchase. Or is it? A savvy investor will know all the ins and outs and structure the deal to suit his cash flow needs. Don’t get me wrong – It’s a great way to bridge the gap between less than stellar credit, no banks involved (initially), and having to build your credit situation to owning a home. There are just so many ways to slice it, education is almost nonexistent and if you’re not careful, a lot at risk.
So why then would you even think that this is an option? That’s easy… There is a stigma attached to the ‘rent to own’ idea that people who cannot qualify for a traditional loan, can still get into a home to eventually own. That’s the idea from the prospective home buyer. It’s a great way to make money as an investor with little or no money out of your own pocket, too! Where these two ideas converge is what makes this a potential for challenges down the slippery slope.
The moral of the story is this: If you’re considering buying a home, don’t be too quick to make any decision until you have all the facts. Not all agents are created equal and most will want to sell you a home the traditional way because it’s what they know. Nothing wrong with that. Remember, there are many loan programs available to you and Renting to Own, Lease purchase, etc. should really be your last option. It is an option, though.
The challenge lies in the fact that since most real estate agents know very little about the complicated mess of a lease option or rent to own, they shy away. Truthfully, unless you’re a very savvy negotiator, there’s no money in it for an agent, either. At least not until the property sells in a year or two, if at all.
My advice? After you’ve sat down with more than one lender to see where you’re at in terms of financing, what programs are available to you – including down payment assistance programs, then you can meet with an agent to discuss what you can buy for that. Just remember, not all agents, lenders, and loan programs are the same. So take notes, do some homework and question everything.
Lastly, if you want help navigating through the process, help finding an agent, or just want someone in your corner that isn’t going to make money on the sale of a home to you, click here. I’ll be happy to help.
‘Til then, best of luck in your travels!
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