Rent to Buy? Some Cautions

Real Estate Agent with Harvest Realty

I think every agent in the real estate business gets occasional calls from people asking about rent to buy properties.  As the conversation proceeds, it appears that there are often credit issues preventing the caller from buying now.  Or sometimes the caller does not have much of a down payment saved up.  So they are wanting to get the process underway while they are accumulating their down payment.

If credit is acceptable and down payment is the main issue, there are still some ways to purchase a home with a very low down payment.  Can a rent to buy situation work?  Of course with the right situation it can work.  But unfortunatley, it sometimes does not result in the renter buying the home.

So what are the elements of a successful rent to buy?  Here are some things to consider.

1) The owner needs to be the actual owner with legal and financial ability to sell.  Is the seller making their mortgage payments?  Will the mortgage balance be low enough to allow the seller to sell?

2) Are all of the terms of the sale clarified up front?  What is the projected purchase price?  Can that price change?  Who will pay closing costs?  Are property taxes to be prorated?  Will title insurance be available?  If so, who will pay the premium?

3) How does the rental amount compare to the current market rent for that type of home?  If you are paying more than the going rate, is that extra amount being applied to the purchase price?  If you end up not buying the property, will that excess rent be returned to you?

4) What are the terms of the lease?  Who takes care of repairs during the rental period?  Who pays taxes?  What about property insurance?  What about renters insurance for your furniture and personal items?  If there is storm damage, who pays the deductible?  If there is a major item needed, such as roof or heating and air conditioning, who is responsible to cover that?

5) Is there any option or up-front money required?  Is there a security/damage deposit? Do these items apply to the eventual purchase price?  What is the status of these funds if the purchase does not go through?

6) What is the initial condition of the property? In a traditional sale, often there is a home inspection to help the buyer have a better understanding of the condition of the home.  If there are major defects, the buyer and seller can negotiate what repairs are to be done and who will cover the costs.  How is the condition going to be verified in the rent to buy situation?

7) Will the house appraise for the amount of the purchase price?  If it does not appraise for at least the amount of the purchase price, then the buyer might have to come up with additional down payment to cover the difference.  Or the seller might need to adjust the price.  Or the deal might be dead.

If there is a way to qualify for a mortgage, that is the best choice for most people.  A good lender can help you determine whether you can qualify for a loan.  And if you don't qualify now, the lender can often let you know what might be required to qualify for a mortgage in the future.  Then you can set goals to meet those requirements.





Comments (6)

Christopher Lotte
Coldwell Banker - Lithopolis, OH
Central Ohio Real Estate Agent, 614-390-9243

Great post thanks for sharing.. Dan Rosenberger 

Feb 16, 2016 10:01 PM
Chrissi Chapman Topoleski
Coldwell Banker Realty - Woodbridge, VA
Helping agents live an exceptional life!

People ask me about this all the time, and there are some points you've made I haven't considered. Thanks for the information.

Feb 16, 2016 11:12 PM
Dan Rosenberger
Harvest Realty - Westfield, IN

Hi Christina, I am not suggesting credit repair.  I think the first stop should be with a lender.  If they don't qualify, the lender might be able to make some recommendations.

Christopher, I hope the post helps people to think through the process.

Chrissi, This is to help people avoid paying for a rent to buy situation that does not result in home ownership.  Information is the key.  Thank you.


Feb 17, 2016 04:26 AM
Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Dan, we do receive many calls asking about this scenario, and have never seen one get to closing around Denver. 

Mar 16, 2016 09:37 AM
Dan Rosenberger
Harvest Realty - Westfield, IN

Hi Joan, Thanks for your comment.  Right now there are just over 100 homes listed in the Indianapolis area where possible financing is Lease with option, lease purchase, or contracct sale.  While it is not common, there are situations where the sellers are making it available.  But it is unusual.

Mar 16, 2016 10:14 AM