Purchasing a home is a big step for anyone who decides to take on the challenge. Making the conscious decision to improve ones future by becoming a homeowner is an admirable thing to do. Along with this decision comes the responsibility to learn all there is to know about the process of buying your home. One method you might find is the "rent to own" process.
- Rent to own offers are very common and misunderstood. Most buyers look at the offer as a fabulous deal. Thinking (mistakenly) that ALL the money paid toward the "rent" will be put toward the price of the home. This is seldom if ever the case.
- Rent to own has also become the focus of many investors who target the uninformed with schemes that are not in the renter's best interest. These schemes are taught on late night, get rich type informercials. Getting involved in a contract that will work against you is never a good thing.
Let me explain the common misconceptions associated with the "rent to own" offer.
Most people first assume that a rent to own offer means the entire rent payment will be used to reduce the price of the home, over the course of the rental agreement. This is not only far from true, but not financially realistic. Let's think about this logically. In order to do so we must assume the homeowner has a mortgage on the house. Even if he didn't there is a cost to borrowing money. Most investors who own property are NOT going to lend money without making a profit.
Using an example of a $200,000 home. You lease it at $1500 a month. The amount of rent that would be put toward your purchase would most likely be a similar amount as if you were borrowing from a bank.
When you borrow money to buy a home, the payment is made up of both interest and principal. In the first states of the loan, the interest is very high and the principal is very low. The principal amount in the one that reduces the amount you owe. Look at the example below.
#1 $134.20 is the principal amount. Relating it to the interest
#2 $1333.33 that's a much smaller amount.
Thinking logically it would be impossible to credit the entire payment toward the price of the home.
Example of Amortization Schedule
Renting to own a home will require a contract and a lease. The owner of the home will typically require the tenant to put up extra cash, for instance an extra month or more of rent. If the terms of the contract are not met within a specified time the tenant loses this amount.
Popular Rent to Own Scams
Certain real estate get rich quick schemes teach would be investors to go into a soft housing market looking for homeowners who need to sell their homes. They contract with the home owner on a long term lease. Offering the homeowner relief from their monthly obligation to pay the mortgage. Usually the investor will take out a long term lease with option to buy on the home.
The investor does not buy the home, but turns around and advertises it for "rent to own" or "lease with option to purchase." The intent is to find a prospect who is not credit worthy to purchase, but needs a home. This prospect has little other options and finds the "rent to own" offer very attractive and is willing to pay a little more in hope that someday soon he will be able to purchase the home.
The problem is, unless the prospect has the desire and ability to clean up his credit, he will not be able to qualify to purchase the home. So who wins? The guy who is leasing the home. He walks away with a hefty deposit and perhaps a premium on the rent his was collecting. He does this without ever actually owning the home.
These investors types do this over and over again. They get enough properties leased at a premium, they risk very little.
Who might be a good prospect for a "rent to own" or "lease option to purchase"
Renting to own has been around for many years. At one time it was a perfectly sensible and respectable way to purchase a home. Like many things it needs to be approached with caution.
Buyers who know for a fact they will be selling a home at some point in time are good candidates. It is very common among people who are relocating from one area to another. Their current home maybe slow to sell due to a sluggish market or maybe it's subject to a rental agreement. Once the home can be sold, then the renters will be in a position to rent.
For families in this situation, finding a home they can settle into while waiting for a previous home to sell, renting to own can be a dream come true.
Buyers who have poor credit scores and need time to correct them find renting to own is a good solution. If they are serious and determined to change their scores, then eventually they can qualify for a mortgage. Dedication is the key to improving poor credit. It's not easy, but it is possible.
How to avoid getting mixed up in a bad rent to own scheme
Since all leases or rentals to own require contracts, hire an attorney to review the contract. A good attorney will cost a few dollars but could save you your down payment, an extra move and some major grief in the long run.
Do your research. The Sarasota Herald-Tribune published an article on the substantial lease-to-own program in Florida that had generated numerous complaints. Over a 5 year period hundreds of deals were executed under this program but only a few resulted in actual purchases. The article stated there were more evictions than purchases.
Arming yourself with knowledge is the best way to approach any purchase. When buying a home, find someone you can trust to give you the story, straight up. Once you are familiar with The Facts, you can decide for yourself if renting to own is a deal or no deal for you!
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Update!
Carol Williams wrote two excellent blogs sharing her process of doing "rent to own properties" that has an 80% success rate. I've included the links here.
"Lease-To-Own: The Bad Way"
"Lease-To-Own: The Better Way"
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