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Philadelphia market conditions encourage rent-to-own

Mortgage and Lending with Joe Brady - World Wide Credit Corporation

As homes in the Philadelphia area are staying on the market longer, many sellers are turning to rent-to-own agreements.  An article in the Philadelphia Inquirer titled Market forces change, by Joanne Cleaver, takes a look at a couple who spent $100,000 in remodeling their home, only to be forced to mark-down their asking price from $475,000 to $439,000.  Now they are forced to look at rent-to-own agreements because they’d rather do that then lower their price further.  Their reasoning? "It's like the stock market: You don't sell at the bottom," says the seller.

            The question therefore begs, what are rent-to-own agreements and are they really beneficial to both parties?  I prefer to call these rent-to-own contracts lease-options, as they give the buyer a ‘lease’ with the ‘option’ to purchase at a given point in time (but this is just a technicality in language that I prefer to use).  The basic benefits for the buyer are as follows:

  1. they can get in the home they want with little out of their pocket
  2. gives a sense of hopeful future ownership
  3. lock in purchase price
  4. chance to repair past credit problems and qualify for appropriate funding in the future

Benefits for sellers:

           1.   quick transformation of equity to cash
           2.   alternative option to lowering your selling price

           3.  great incentive for tenant to maintain property

           4.  calculated rate of return with little market risk

Described above is a brief overview of the benefits for traditional lease options.  However, here at World Wide Credit, we have been advising REALTORs on how to create a market through the use of lease options, and still get paid.  Typically real estate agents shy away from lease options because there is no reward.  The premise of the lease options program involves matching up investors/sellers with potential lease options clients.  With the current market conditions in Philadelphia and around the country, this different type of real estate may emerge as a practical alternative for REALTORs.  Specific to this topic, we presented an audio and visual ‘webinar’ that had great response.  For a copy of the presentation please feel free contact me.

            So is the seller in the article doing the right thing?  In their situation, it would make perfect sense.  They are sticking to their claim and not “selling at the bottom.”  This is just an example of the changing marketplace and how lease options may soon become the most viable option for sellers who cannot sell at the price they want.

Marcus Valdez
Berkshire Hathaway Rocky Mountain Realtors - Fort Collins, CO
Just be careful about applying rent dollars toward purchase price.  it can be a bad way to do things
Aug 14, 2007 11:05 AM
Diane Rice
Rice Prprty Mgmnt & Rlty, LLC, South Holland, IL - Lansing, IL
Hi Joe!  Rent to Own is a BIG market where we are!  I'd definately like a copy of the webinar presentation.  We've increased our business tremendously as a result of homes not being able to move, as we do property management in 2 States. Opportunities for renters to own is better than it's ever been.  Looking forward to hearing more about your strategies.  Thanks for this post.
Aug 14, 2007 01:00 PM
Laurie Mindnich
Centennial, CO
While a lease option is the least desirable possibility, if the costs are equitable to the buyer as well as the seller, and the mortgage is being covered with a swift remedy for non performance, it should be considered for those that, after understanding it fully, choose to purchase that way.
Aug 14, 2007 02:41 PM
Brian Brady
Matthews Capital Markets - Tampa, FL

Lease options or lease option financing (a term we've coined at WWCC) is a viable alternative financing tool.  I'm impressed with the knowledge you've picked up this summer and astounded at your ability to verbalize it.

Your absence will be conspicuous this fall.


Aug 14, 2007 03:57 PM
Bob & Carolin Benjamin
Benjamin Realty LLC - Gold Canyon, AZ
East Phoenix Arizona Homes
We are seeing more renting situations here in Arizona also. Its just the state of the market right now it seems.
Aug 14, 2007 04:21 PM
Missy Caulk
Missy Caulk TEAM - Ann Arbor, MI
Savvy Realtor - Ann Arbor Real Estate
Good inormation, we are starting to see more and more of this in Ann Arbor and your explanation was excellent.
Aug 14, 2007 11:34 PM
Janie Coffey
First Coast Sotheby’s International Realty - Ponte Vedra, FL
Uniting Extraordinary Homes w/ Extraordinary Lives
we've got that all over Miami, right there with you my friend!
Aug 14, 2007 11:34 PM
Margaret Woda
Long & Foster Real Estate, Inc. - Crofton, MD
Maryland Real Estate & Military Relocation
Another page out of the past!  This is a tool that went away in the recent seller's market, but it may be time to resurrect it.  Thanks for pointing that out - I'm going to have to think about how I might use this in my market.
Aug 15, 2007 02:59 AM
Rebecca Savitski
BSR Real Estate Group - Cary, NC
NC Real Estate Listings
I have been recommending this to several sellers over the past year. The results have been mixed to say the least. 1 horror story always ruins the great idea.
Aug 15, 2007 03:04 AM
Joe Brady
Joe Brady - World Wide Credit Corporation - Villanova, PA
Thanks for all the comments.  Rebecca, sorry to hear about the horror story, but with these markets there are bound to be a few for some people, its inevitable.
Aug 15, 2007 05:35 AM
Marcus Valdez
Berkshire Hathaway Rocky Mountain Realtors - Fort Collins, CO
are you doing a strict lease option or are you applying some rent to the purchase?  again i would be really careful about doing that.  you may find yourself in a new world you didn't think about going in .
Aug 15, 2007 05:57 AM
Joe Brady
Joe Brady - World Wide Credit Corporation - Villanova, PA
We do a lease option where none of the rent is applied toward the purchase.  thanks for the heads up though.  have you had a bad experience with applying rent to the purchase because i have never done an option like that.
Aug 15, 2007 06:08 AM
Marcus Valdez
Berkshire Hathaway Rocky Mountain Realtors - Fort Collins, CO
Almost.  i think you would have to have a rockstar lawyer too but the general concern is that if you are applying some rent to the eventual purchase a really good lawyer. (depending on the wording in the contract) might make the arguement that the renter/buyer actually owns some of this home.  so not if faced with eviction or sale to another party could have to foreclosure before they could evict.  (ruining the sellers credt while he tries to regain control of his house or find himself in a forced partnership.  FUN!  so just be careful you don't do that.  the risk is not worth the potential issues.
Aug 15, 2007 06:17 AM
Joe Brady
Joe Brady - World Wide Credit Corporation - Villanova, PA
Wow. I was not aware that this was an issue.  thanks for the useful information Marcus!
Aug 15, 2007 06:29 AM
ARDELL DellaLoggia
Better Properties Seattle - Kirkland, WA
When my Mom sold a house in Philly, she held the mortgage.  It worked well.  She got a high return and the buyer got a mortgage after a few years and paid her in full after the value increased.  Everyone was happy.
Aug 15, 2007 05:21 PM
Glad to hear that Ardell! That's how lease options should work.  Thanks for your comment.
Aug 16, 2007 04:57 AM
Robert Kerr
Kerr Financial - Warwick, RI

Are [rent-to-own agreements] really beneficial to both parties?

In this down market? Are you serious? It's almost always a terrible deal for the renter.

Aug 16, 2007 04:08 PM
Joe Brady
Joe Brady - World Wide Credit Corporation - Villanova, PA
If done correctly and in the right market, particularly important is home appreciation rate, they can benefit both parties.  For example, if a potential buyer has been searching and finally finds their dream home but cannot get the financing because they are Alt-A or subprime, especially "in this down market" it is extremely hard to finance, they will be able to get that home and work toward resolving their credit woes or whatever problems to hopefully purchase it in later years.  And most are willing to pay that extra rent.  
Aug 17, 2007 04:36 AM