Real Estate Blog - Rent to Own....an option but not always the best solution

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Rent to Own....an option but not always the best solution

We all know the economy is making it tough for consumers to purchase new homes. We also know that many people trying to sell cannot due to declining values. They purchased the home with virtually no equity and now are stuck with a home with negative equity. They lose their job and then have no alternative but to try to sell short....go into foreclosure or to lease out the property with hopes of holding on to it until property values go up. The trouble with renting property is that in my area most rentals cannot even command enough to pay the operating expenses that it takes to hold the property.

Then there is the rent to own option.This was a good idea a few years ago but in my opinion there are major risks involved if it doesnt have a happy ending. It's had to write an option contract with a price in mind when property values continue to decrease monthly. I currently own a property with two partners of mine. When we purchased the property we paid cash and spent a lot to renovate it.

We had bought approximately 15 properties within that year and renovated most of them and sold them. We had a few that we held onto for a few years and rented them out and eventually sold them just as the market started turn downward. We were lucky. The property we currently own is worth less than what we paid for it but we don't have a mortgage on it. We tried to sell it 6 times but every-time we tried to close on it....the buyer couldn't get a mortgage.

The buyers agent didn't do their homework and we tried to give them 6 opportunities to qualify. We even tried to send them to a mortgage broker we knew pretty well just to see if they really could afford to buy the home. Not only were they capable of purchasing the home.....the mortgage broker was able to repair their credit enough to qualify. For some reason....the buyers had some sort of issue with their agent and walked away from the deal. To this day......I'm not sure what happened other than the fact that we gave them many chances and tried to help point them into the right direction. Apparently they weren't grateful enough to even thank us and we weren't even their agent.

How many chances do you give people?

Eventually we decided to lease out the property. My partner thought that by offering an rent to own option....it would attract someone with an incentive to but the property a year later in hopes that they would be able to achieve financing when the smoke cleared.

I was never confident that the tenant would ever qualify for a mortgage and I never thought they would sign the option....I was right....they never did and they still live in the property but at a reduced rent.

We ended up finding a tenant who was willing to sign a deal with us to lease the property. I never liked the idea of the rent to own option. In my opinion there are too many risks for both the owner and the tenant. Too many problems with financing and or future pricing for example. But if you find the right situation ....it could work out as well and have a happy ending.

Which ever way you decide to go...just make sure you do your homework first.

I'm not going to discuss those risks in this blog post. You can read it below.

The Sun Sentinel recently posted an interesting article on this subject...you can read more about the negatives and the positives>>>HERE.

For more information please contact Neal The Real Deal Bloom-Realtor® /RE/MAX Premier Associates.

2500 Weston Road ,Suite 103

Weston FL 33331

(954)608-5556

Nealb63@myacc.net

Posted by Neal Bloom-Realtor ® Assoc.-CRS-Weston FL on 01/19/2009 08:57 AM

Comments (23)

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Originally posted at: Weston Florida Real Estate Blog, Neal"The Real Deal"Bloom : Rent to Own....an option but not always the best solution

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23 Comments on Rent to Own....an option but not always the best solution

JAN

Neal - there are a lot of unknowns which (what we call lease option). You have to agree upon a price, put up option money, there are definitely unknowns which can influence the deal.

The other complicating factor right now with the rent to own scenerio is the fact that the owner may not be on solid finacial footing. The tenant/future owner could find themselves in a sticky situation without really doing their home work.

Sharon,

Even if you set a price...it could still be renegotiated at today's market value and what happens if the renter can't get qualified a year later? Also not many renters would be willing to risk losing the deposit.

Bill,

Excellent scenario which I believe they failed to mention in the article. Imagine if the tenant signs the option and then the landlord has to sell short or go foreclosure...I hope they disclose that. I imagine that the contract would become null and void but I'm not sure if the deposit on the option would go to the landlord....there are probably ways around that too, The landlord could just keep the money and then disappear too.

I agree....many things to consider FIRST and even then it is pretty risky. Who knows what may happen even six months down the line.

Neal I don't like "Rent to Own" either, it implies more than it really is. In my opinion both the renter and owner are better off just agreeing on a fixed amount that the owner will contribute towards Closing Costs should the renter decide to purchase after a specific date. "Rent to Own" is sticky on the mortgage side because the renter is only suppose to be able to use as a credit the amount of money that they paid over the market value of the rent.

Sally,

Even if you set the price and terms...I've heard people try to renegotiate it. Our tenant is still a tenant and never signed the option so in my opinion they are renting....we only have the luxury to keep renting it and we actually have seen a positive disbursement.

George,

They can't have it both ways...money towards a down payment but without a risk to their deposit. I personally think its more risky for the tenant than landlord.

Hi Neal,
My experience has been that renters very seldom exercise the option to buy. Personally, in this market I would advise it tenants against it--too many variables are you mentioned.

Very tricky business the Rent to Own. Especially in a market like this. I agree that it's the tenant who's taking more risk right now while property values continue to decline.

Never actually coordinated one for a client, but they make me uncomfortable ! Good info in your post though, I should probably brush up on the guidleines, just in case...

Good luck with your investment Neal !

Neal I agree.

I hate rent-to-owns. The legalities of the contract are mind-numbing. I would not recommend one to a customer at this point in my career unless the planets were seriously aligned...

Neal... I would agree... rent to owns were very good back in the mid 90's. When values soared, it wasn't good for the seller.... and now that they have dropped, yes, it is risky. Do I see future values dropping? Not in most areas. But you made all valid points, especially the one.... if it fits for you, then try it... good luck with it...

jeff belonger

JAN

Neal: Very informative blog. Thank you for sharing. It is just too risky in my opinion also for a lease option.

Neil,

Rent-to-own in this real estate market can be really tricky to execute so that both sides benefit. The hard-hit markets like in Florida and Nevada are especially treacherous for that.

JAN

Neal, MANY, and I mean many, rent to owns, only rent. They really have no interest in owning when they think about it, or they move on to something else.

... I just used your post here with a client today ywho was considering a rent to own situation ...

....... he's not anymore :o)

Cheers !

Sheldon

JAN

I've been on both sides of the rent to own option, all of them turning out well. I prefer to simply hang on to properties now. That monthly income arriving in one's mailbox is pretty nice.

I totally understand the concept but in my area prices are still going down and as I stated about our tenant. I knew they wouldn't sign or risk losing the extra deposit. In the end they are still renting...I figured that with the way the economy was last year that there would be no way that they were going to be able to qualify a year later.

I remember seeing your posts for this property when it was for sale. I suppose if it was one of my own properties in this market I would give someone as many chances as they needed to buy it. However, if it was a client that I was working with, I would not even take them out to show them properties unless they were pre-approved first. It is a waste of my time and theirs...

JAN

Neal, I have come to the same conclusions about a lease-purchase recently. With the values declining, by the time the purchase is scheduled there is a good change the actual price will be less in which case either it won't appraise or the buyer will back out. I think it is better to do a simple lease.

JAN

Neal--Everyone seems to want to rent-to-own these days. I don't know that it is a great deal either. Contract for deed might be a better option but has some of the same downfalls. As you said, look at the options by doing your homework before making any decisions.

Neal,

I saw this post a few days ago and wanted to comment but then got distracted for some reason that I can't remember. Seeing the mention in this weeks MWIR bought me back. Congratulations!

This is an excellent post for prospective homebuyers that feel their only alternative may be Rent-to-Own. Straight foward I am not very fond of rent to own deals. From what I have seen or been exposed to, more often than not the Renttoowner got into something that they had no business getting into....not all to different from the borrowers that got into the subprime ARM's, Option ARM's, etc. A day of reckoning was on their event horizon. Not to say that there may be some good opportunities and reasonable terms out there but buyer beware! Seeking counsel or professional review of the agreement would be the best advise that I could offer. Again, congrats and great article.

JAN

Personally I think it was a good concept for people who want to buy but need to wait to save up enough money but it's also a teaser to see all that money put aside and they might end up blowing it all. Also in a very volatile market that we are still in...there is really no way to determine a market value price and there could be a debate when time is due to purchase. Also...most people won't take the chance ans sign the option because of the risk of losing the option deposit if they don't move afford with the sale or can't move forward. Remember that if the tenant doesn't sign the option then it's basically just a rental.

Also it really depends on the neighborhood and the income people have there. It's difficult for people with low income and bad credit to ever be qualified. That's what happened to ours...still a rental and not a sale and the guy is late every month so how can he buy when he can't even pay the rent on time.

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