I get a lot of emails and phone calls from folks that want to know if I can find them a home to rent with an option to purchase. They have been on the internet, surfing, dreaming and hoping against hope that they can find a home to rent that will also be available for purchase at the end of their lease.
Now, some of them may have tried to purchase a home and found that they did not have the resources. Maybe they discovered that lenders have a higher bar than the FHA requires. It can be quite confusing out there for your average consumer. The FHA says they will guarantee loans for people with a credit score as low as 580, but the lenders say they will not lend money to anyone with a score lower than 620. I do this for a living and don't understand how lenders get away with this, but they do. It is the 21st century's form of "redlining". The folks that are turned away begin seeking other alternatives.
In there search, the come across ads that offer them the opportunity to rent/lease a home and eventually be able to purchase the home. There are firms that advertise "rent to own" homes using phrases that appeal to those that have been denied a mortgage. They offer their services to buyers who want to:
- Secure a home
- Own a home with less than perfect credit
- Live in it now
- Want to explore all options in how, when and what type of financing.
It sounds too good to be true. In my opinion, it is just that, too good to be true. Rent to own purchases have all the upside and downside of borrowing money from a loan shark. Yes, you may get into a home, but when the terms are realized, you may not be in line for the experience you expected. If you step back and analyze the potential outcomes, you may rethink your decision. Most consumers just don't know or understand.
Rent to Own? Before you ask, consider these factors. The owner surely wants to sell. The owner has not found a buyer willing to pay what the owner wants to receive for the home. The owner will probably have a price in mind that is a bit higher than market value. The potential rent to own buyer will most likely accept a higher price because it is the only way they feel they can own a home. A deal will be negotiated that allows for the sales price and the earnest money that will be accumulated in addition to the monthly rent. By the way, the base monthly rent will probably be higher as well. The rent to own buyer will accept this fact because, after all, it is a home they are going to own.
The amount of money needed each month will begin to add up. Let's just say the home is listed for sale at a price of $300,000. Homes similar in age, condition and location are selling for $280,000. The seller points out that as time goes by, the value of the home will increase. The seller also points out that the sale will be consummated next year and the value of home will probably be greater then. The poor consumer can not buy one of the $280,000 homes, so they accept the sales price. The seller explains that the rent is only $700 per month higher than comparable rentals, but remember, you aren't buying one of those and $500 of the rent is going into an escrow account that is your earnest money deposit. The $6,000 that accumulates over the year will be applied to your down payment or closing costs.
Stop and think. Do you think the fine print is going to protect you? What do you think will happen, if at the end of the year the value of the home has plummeted even more? What do you think will happen if your circumstances change and you can not proceed? What sort of interest rate do you think you will be charged? Oh, and what do you think will happen to your $6,000 if you do not actually buy the home?
The ads that indicate you own the home a little bit of the time as you rent are not true. You do not own one brick until the title is transferred into your name. Sure, on an emotional level it all sounds to good to be true. In reality, it is too good to be true. Anyone that suggests that renting to own will solve any of the following is a buffoon.
- Your needing time to arrange a shortage of a down payment
- Your needing time to solve credit issues that are temporarily preventing you from owning a home
- Your desire to "try-out" the house, schools or neighborhood first without a 30 year commitment.
If you can not qualify to buy now... rent. Save your money for a down payment. You should control your options and one of them should never be "option to buy". Do not let their tail wag your dog. Home ownership can be accomplished. There is no fast track. There are no short cuts. The past five years should have revealed the fact that those that can not afford will lose what they attempt to buy. Don't become yet another casualty left by the side of the road by those that continue to take advantage of the uninformed and under educated consumer. Rent to own? Before you ask, make sure you are asking someone that will tell you the truth.
We are Tudela-MacArthur. We are Realtors working with REMAX Realty Centre. We represent buyers and those seeking to rent. We can be reached at 301-509-5111. You are welcome to visit our website Tudela-MacArthur
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