Earlier in the week, Kristal Kraft created a blog post titled: "Rent-to-own... deal or no deal"
It was an excellent article, explaining many misconceptions and problems involved with the rent-to-own alternative to purchasing a home. If you haven't already done so, I recommend you find time to read that article.
Please bare with me, now, through my ramblings on the subject. As I got into writing this article, I realized it needs to be in two parts. When I come across a blog entry that is too long, I find myself skimming and probably miss some good stuff. So, I'm making it two articles.
I suppose I could have gone straight to the second part, but I wanted to share my observations about the typical rent-to-own transaction:
First, I'm going to talk about my perception of rent-to-own transactions in general. I think the national average for success on rent-to-own transactions is a woeful 20%. The program I work has an 80% success rate. It's an intelligent alternative. That will be in the next blog article. There are a myriad of reasons why people turn to looking for a rent-to-own home. The most common I've encountered are:
* Poor credit
* Self-employed without adequate income history
* Newly employed, without adequate work history
* Pending divorce and don't want to put property in their name at this time
In all cases, for whatever, reason they cannot get conventional financing. I always recommend people go the conventional financing route if they can because we don't know what is going to happen with interest rates in the future. Those who can't get conventional financing want to buy a home now because they're tired of paying rent and they want to start enjoying the appreciation advantages of owning a home before prices go up any further. And yes, our market is still appreciating. Wenatchee, Washington was named by MONEY magazine as being forecast to have the 2nd highest appreciation rate in the nation (behind Panama City, Florida) for the next year... at slightly over 16%. Our market dynamics are very strong, with unemployment rates at a 16 year low!
The two major problems with most rent-to-own offers are:
1) Those available are NOT good deals.
2) Very limited selection, often substandard homes
First, most "rent-to-own" transactions are definitely NOT good deals... for the buyer that is! Most "rent-to-own" offers require "option money" (similar to a down payment), and charge high market (or over-market) rent. Sometimes there is a credit-back, but not always. Kristal did a great job of outlining the financial facts and why a seller probably won't give much of a rent credit, if any. I don't know where in the world people got the idea that all rents would be credited toward the purchase. It just doesn't make any sense. There is no reason why a seller would let someone live in the home for free... especially a desperate buyer who can't get financing. HELLOOO
Secondly, most sellers (except the schemers) want to sell their home out-right and get the cash to buy another home, pay bills, make an investment or whatever. For these sellers, rent-to-own offers are a last resort. The homes available are, generally, limited to homes that haven't sold through traditional means. They're either over priced or just don't appeal to the main stream buyers. So rent-to-own buyers are very limited in the homes they can choose from and their choices are not usually good ones. It's a very bad thing when a wannabe buyer agrees to purchase a home that may not even suit there need, just because it's the only one available on a rent-to-own.
Back to the "schemers". Truth be known, these are the ones who put together a rent-to-own deal, hoping the tenant cannot or will not be able to buy the home. They get to keep the upfront option money and do it all over again with the next desperate wannabe buyer. Most of these options are only for one year and that's not enough time for the wannabe buyer to get their financial act together enough to qualify for financing. A year goes by very fast when there is a deadline looming.
All these factors doom most rent-to-own transactions. BUT, there IS a better way. And, I'll write about that in my next blog article, to be posted later today.