Lease-To-Own: The Bad Way

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Education & Training with Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals.

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.



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"The best way to predict the future is to create it!"
- Peter Drucker

"Information is FREE. Knowledge, Experience & Integrity Are Priceless."

-Carol Williams

Retired: Real Estate Broker/Owner, Property Manager 
Coaching, goal setting and marketing consultant by appt.

Active: Golf & Travel Blogger
"Golf isn't a sport. It's a lifestyle."
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TopTeamCarol@gmail.com


 

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Ambassador
927,818
Kristal Kraft
The Berkshire Group Realtors - Denver, CO
Selling Metro Denver Real Estate - 303-589-2022

Carol, Your reasoning is sound and well written.  I am going to "amend" my original blog to include a link to yours.  This information from the INVESTOR side is way to valuable to miss.

Thanks again for taking the time to blog.  You help so many people by posting your counterpoint!

 

Nov 16, 2006 02:04 PM #1
Rainmaker
1,329,087
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager
Thanks, Kristal
Nov 17, 2006 11:30 AM #2
Anonymous
Karen

Hi Carol, I was wondering if you could give me some honest feedback. My husband and I are moving and our house in Detroit is not going to sell. We both got jobs in Columbia , SC. My husband will be making $50,000 a year and I about $33,000 a year. We  want to buy a house that costs about $141,000. Would that be in our price range? We are looking at using National Home Buyers Association. Have you heard of them? We must lease for two years before we are given the option to buy the house and we work with them to clean up our credit. What do you think?

 

Apr 02, 2007 04:08 AM #3
Rainer
5,291
Roz Burton-Torres
WA Real Estate Solutions - Kirkland, WA

Hi Carol, reading your post made me think of 'there are good people out there and there are bad people out there' Good transactions and bad transactions. I think another factor that you are not pointing out is the financing that the Seller has to take into consideration as well to choose to sell their home the Rent to Own way. Most sellers I encounter have very little equity to even sell their house plus they have a huge pre-payment penalty on it. So for the seller, it doesn't make sense to Sell the house now BUT they need to move NOW. This is where the RTO program comes in place. The Seller will sell the house at what market value is today with a conservative appreciation mark up to the RTO Buyer. The RTO Buyer knows what the price is and is getting a lower monthly payment than what it would be for them to purchase now. The RTO Buyer will have time to build up their down payment so they can sustain a lower monthly payment. It is true that the monthly payment is more than what current rents are but lower than what the mortgage payment would be if they were to get financing now. With the payment history, we would show to the bank that the RTO buyer has been making this payment consistently thus proving their payment worthiness as well as working with them on their credit for the best financing.

 

 

Roz Burton-Torres

425.825.0121

http://www.warealestatesolutions.com/

Find out more about Rent to Own and what properties we have available!

Apr 28, 2007 05:46 AM #4
Anonymous
Anonymous
Carol if you can't get a rent to own to work you are NOT doing it properly. It's that simple. Just last month- even with the uncertainty with the subprime mortgage crisis- I signed 7 new rent to own contracts with homeowners, then easily flipped them on a sandwich lease to tenant buyers, with down payments. I just made almost $20,000 just from non refundable deposits working maybe 150 hours last month- not even full time job hours and much easier than a conventional job, and if all these deals go through (which most should, since as a rent to own investor you need to help your tenant buyer qualify for a mortgage, which is easy to do) that's another $79,000. The majority of all rent to own deals I have done have been successfully purchased by my tenant buyer. You and Kristal are obviously doing something wrong, so don't blast a method of investing you clearly don't understand and don't scare good people away from something that could be their life changer.
Sep 27, 2007 06:41 PM #5
Rainmaker
1,329,087
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager
To Anonymous (who posted the last comment), you clearly did not read my complete article or the follow up string between Kristal and me. I posted a follow-up article called "Lease-to-Own: a Better Way".  I am always looking for a way to make it a win/win for everyone.
Sep 27, 2007 10:46 PM #6
Ambassador
927,818
Kristal Kraft
The Berkshire Group Realtors - Denver, CO
Selling Metro Denver Real Estate - 303-589-2022

Carol at least you and I know how to sign in. LOL!

kk 

Sep 28, 2007 01:31 AM #7
Rainmaker
1,329,087
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager
Hi Kristal,  That... AND we're not afraid to identify ourselves.
Sep 28, 2007 03:06 AM #8
Anonymous
Dion

Saddly but true. Deals on the market available for rent to own are mostly junkers, and the tenant buyer is the one who suffers. I think one year is a short period to fix fianancing but it sure beats waiting to get someone to pay the mortgage.

Dion Wisniewski

c/o First Coast Management and Realty

www.firstcoastmanagementandrealty.com

Oct 05, 2008 12:26 PM #9
Rainmaker
266,618
Jim Gilbert
Keller Williams Fairfax Gateway - Manassas, VA
The Gold Homes Team

Carol, next time ask us to "bear with me" not "bare with me"!

Dec 27, 2010 03:35 AM #10
Rainmaker
266,618
Jim Gilbert
Keller Williams Fairfax Gateway - Manassas, VA
The Gold Homes Team

   Great, well-written post. 

 In a down market, where prices are flat or falling, it may make more sense to simply rent than attempt rent-to-own.

  The portion of the rent credited towards purchase or option is not deductible as mortgage interest anyway.

  And without appreciation or mortgage interest deductibility what the advantages of owning over renting are rather modest.

 

Dec 27, 2010 03:39 AM #11
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Carol Williams

Retired Agent / Broker / Property Manager
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