Is rent-to-own as good as it sounds?

By
Real Estate Agent with Austin Skyline Realty Inc. 650995

People often ask is the ‘rent-to-own’, also known as ‘lease-to-purchase’ a good alternative for homebuyers? The idea is enticing, especially for first time homebuyers who often don’t have a very good credit or have trouble coming up with the upfront cash for the down payment, The basic concept is that you and the seller agree to purchase his/her house at the end of a period of time, usually two to three years. During those 2-3 years, a portion of your monthly rent is credited toward the down payment when you ‘purchase’ the house.

To get the privilege of ‘postponing’ the actual title transfer:

Lease to purchase option for first time homebuyers
Lease to purchase option - Is it worth it?
  • You pay an up-front fee (called an option fee), which is typically 1-5 percent of the home’s purchase price. The fee is usually nonrefundable, but part or all of it can be applied to the down payment.
  • You may also pay a higher monthly rent, but a portion of the rent will go into a fund that is later used for a down payment.
  • The agreement locks-in the purchase price for the house.
  • You can purchase the home on or before the lease’s expiration date.

Sounds pretty straightforward and clear. However, the more you learn about its pitfalls, the less you like it. Here are just a few of many pitfalls.

  • Any lease payment that is to be credited towards a down payment is the amounts over and above the market rent. So, you pay more than the market rent during the lease period. Also, any such amounts to be credited to closing costs are limited by the type of loan (the limit is usually between 3% - 6%).
  • When the term of the lease is over but the property has not increased in value up to the indicated amount in the agreement, if you decide to walk away from the deal, you will lose your deposit.
  • You only have a predetermined ‘option’ period. If the house value is increased but you can’t qualify for a loan at that time, you will lose your deposit.
  • Generally you, the tenant, are responsible for maintenance of the house during the option years.
  • Should the seller have financial problems, get foreclosed on, or incur other liens, you plans could be upset.
  • If the seller doesn't actually own the house, or if you make your payments but the seller doesn't pay the loan on the house, you could lose part or all of your extra payments.
  • Since you are not the owner, buying insurance for the house could be an issue. Also, any insurance on the house may not cover your investment.

A comprehensive contract agreement is needed to cover all these details. These are beyond the standard a typical Real Estate Sale Contract and certainly not a do-it-yourself contract. For these and many other reasons, the Texas Legislators has made it mandatory to have lawyer involved in these types of contracts. It is required by the Texas Real Estate Commission that an attorney representing you, be involved in the transaction to ensure that the contract respects your wishes, although having an attorney is no guarantee that you won't have problems anyway. Guess who pays for the services of that lawyer,  you the buyer!

The idea of lease-to-purchase seems to be more popular in a ‘down’ housing market, where sellers can’t find a buyer outright and find this method of financing a good alternative. Austin area is in a sellers market and current projections calls for that to continue, at least through the next year. It is hard to find a seller willing to agree to such a deal.

On rare occasions with a carefully crafted agreements that address a specific situation this can work. However, these cases do not involve a buyer who can not obtain lender financing. These successful transactions require professionals who are able to 'match situations.' They will NEVER be advertised as lease-to-purchase.

If you are looking at lease-to-purchase as a way of getting around you not-so-good credit or have trouble coming up with the down payment money, consider the following plan for a purchase in 1-2 years. You want to do this BEFORE you jump into a house, not while you are in it.

  • Save, Save, Save!
    • Live as cheaply as you can. Rent as cheap as you can stand; for example a one bedroom or smaller in the cheapest place you can feel safe. Rent until you have the proper credit scores and sufficient cash to afford to purchase a home. You'll need at least enough money for the 3% required via FHA and likely quite a bit more.
    • Save the extra amount that you would’ve been required to pay if you were in a lease-to-purchase situation.
    • Save every dime you can, eat at home, watch movies at home, entertain yourself with FREE events. Don't blow money anywhere. Pay off all your debt and save for a down payment.
    • There are many websites that provide budget minded tips and plans.
  • Get your credit in order and build your credit
    • Consider contacting a local lender who has a history of investing in your community through small business loans and home loans.
    • Select an "A" or "B" Graded banks in your community. Don't make things worse by entering the lobby of a 'Too Big to Fail and Too Big to Care' bank. You will see that Bank of America, Wells Fargo, Chase and Cite are all "F' graded lenders
    • Talk to a trusted mortgage lender and tell them your plans, your current budget, salaries, etc. They can provide you a plan to repair and rebuild your credit and give you a timeline of when you may be able to start shopping for your first home. I have a list of some local mortgage lenders if interested, contact me. Some lenders would be happy to look at your overall situation and may even recommend a reputable credit repair company that they work with to help you.
    • There are credit repair companies that can examine your credit and provide you a plan of action and even help you negotiate with creditors to bring your score up. Unfortunately, there are a lot of scam artists in this field who charge you money and get nothing done, so be very careful.
    • Even if you're not going to be ready to buy for a year or two, I recommend getting pre-approved with a lender and having somebody look over your whole scenario, from credit, to debt, to income, etc.
  • Plan for your purchase
    • Keep your eye on the real estate market; use this time to narrow down neighborhoods based on your future family plans, job commutes, entertainment needs, etc. If your credit situation is not totally off the low end of the charts, the time will pass quickly and you will be a new homeowner before you know it.
    • Look for alternate down payment programs.
  • In short, be PATIENT, and SAVE SAVE SAVE, until you're in a solid financial position then find a good Realtor to help you find the right property and terms that are beneficial to you.

If you have been thinking of buying your dream home, but don't have enough money saved for down payment, in my judgement rent-to-own is not a good solution. Instead, use some of the suggestions above, read my 'First Time Home Buyers' post and contact me with any questions for further assistance on this or other real estate questions.

 

 
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Moe Dadseresht
Austin Skyline Realty
512-740-6945
Licensed In: Texas
License #: 650995
     
Posted by

Moe Dadseresht

Austin Skyline Realty, Inc.

 

  •  p:  (512)740-6945             c: (512)740-6945
  •  w: www.moeproperty.com  e: moe@moeproperty.com
  •  a:  11507 Hare Trail
  •       Austin, TX 78726
 
       Texas Real Estate Commission

Comments (25)

Sharon Kowitz
CRS-SRES-ABR-GRI-E-Pro-CREN ~ COMPASS RE - Cary, NC
Cary, NC Relocation Specialist ~ Buying or Selling

This is a lot of great information, thank you for sharing!!

Jul 13, 2016 01:33 PM
Sharon Kowitz
CRS-SRES-ABR-GRI-E-Pro-CREN ~ COMPASS RE - Cary, NC
Cary, NC Relocation Specialist ~ Buying or Selling

...Also, Welcome to ActiveRain and congratulations on your first blog!

Jul 13, 2016 01:33 PM
Moe Dadseresht

Thanks Sharon, 


I have been asked this question  many times and it seems like an easy solution for the difficult problem of 'inability to save'!

Jul 18, 2016 02:46 AM
Bob Crane
Woodland Management Service / Woodland Real Estate, EXP - Stevens Point, WI
Forestland Experts! 715-204-9671

Hi Moe,

I get several rent to own inquiries on my rentals every week, most are not qualified to rent or buy.

Welcome to Active Rain, looking forward to reading many more of your posts, let me know if there is anything that I can do to help as you get started here.
Bob

Jul 13, 2016 03:03 PM
Michael J. Perry
KW Elite - Lancaster, PA
Lancaster, PA Relo Specialist

In our ares Lease Purchase Agreements are rarely Win/Win ! More than 50% never go to final settlement and the Buyers forfeit all $$$ paid in !!!

Jul 13, 2016 07:01 PM
Kat Palmiotti
406-270-3667, kat@thehousekat.com, Broker, eXp Realty - Kalispell, MT
Helping your Montana dreams take root

Welcome to ActiveRain.

It seems that most people today have a huge problem saving. Those that do make more than they need, usually spend it all anyway (and more). Saving is not something that most people do well but it would be a huge help towards getting a new home if they could get into the habit.

Best wishes with your blogging.

 

Jul 13, 2016 08:52 PM
Moe Dadseresht

Hi Kat,


I agree that saving is difficult for some, but knowing that you may lose part or all of your money (as Michael J. Perry above points out) could encourage some peple to do so.


Thanks.

Jul 14, 2016 12:36 AM
Tony and Suzanne Marriott, Associate Brokers
Serving the Greater Phoenix and Scottsdale Metropolitan Area - Scottsdale, AZ
Haven Express @ Keller Williams Arizona Realty

It works for some...for others...not so much...

Welcome to Active Rain Moe Dadseresht!

As REALTORS® who have been here for almost 10 years, it's well worth it!

We wish you great success with your blog posts and networking with other members of Active Rain!

We clicked the “Follow” button on your profile so that we will be alerted to your future blog posts and can read and comment on them, and we invite you to "follow us" - should you be interested - by clicking the “Follow” button you see underneath our photo to the left. There is no requirement or obligation for you to do so, but we would be honored if you choose to do so!

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Jul 13, 2016 10:14 PM
Moe Dadseresht

Thanks for the info.

Jul 18, 2016 02:46 AM
Barbara Todaro
RE/MAX Executive Realty - Retired - Franklin, MA
Previously Affiliated with The Todaro Team

Good morning, Moe Dadseresht I was never a fan of lease to purchase....and I never wanted to be involved in that type of transaction....there are too many factors that influence the positive aspect of that concept of buying and turns it into a negative.....it's like an evening at the crap table.....

Jul 13, 2016 10:21 PM
Barbara Todaro
RE/MAX Executive Realty - Retired - Franklin, MA
Previously Affiliated with The Todaro Team

and welcome to ActiveRain....it's a great place to learn, share, market and network....and I hope you enjoy it and benefit from all of it....

Jul 13, 2016 10:26 PM
Sybil Campbell
Fernandina Beach, FL
Referral Agent Amelia Island Florida

Hi Moe Dadseresht, Welcome to Active Rain and congrat on your first blog post.  This is a great place to meet and interact with other professionals while learning about different real estate markets.  i have never done a rent to own and I've been a REALTOR since 1999.

Jul 13, 2016 10:47 PM
Alan Kirkpatrick
Austin Texas Homes - Round Rock, TX
Alan in Austin

Moe Dadseresht 

Good post. Welcome to Active Rain. Glad you are with us. Have a wonderful week. 

Jul 13, 2016 11:09 PM
Harry F. D'Elia III
RentVest - Phoenix, AZ
Investor , Mentor, GRI, Radio, CIPS, REOs, ABR

I personally like to do rent to owns to get people into homes. However, the seller and buyer must plan fairly.

Jul 13, 2016 11:53 PM
Moe Dadseresht
Austin Skyline Realty Inc. - Austin, TX
Buyer/Seller agent
Jul 14, 2016 12:21 AM
Sam Shueh
(408) 425-1601 - San Jose, CA
mba, cdpe, reopro, pe

Right now no. Price is still moving up.....

Jul 14, 2016 12:48 AM
IRMA Beltran
Century 21 M & M and Associates-Turlock homes Real Estate - Turlock, CA
Your Real Estate Agent 4 Life Always there 4 You!

Welcome to Active Rain! Congratulations on a very informative blog.

Have a Wonderful Blessed Day!!!

Jul 14, 2016 02:29 AM
Inna Ivchenko
Barcode Properties - Encino, CA
Realtor® • GRI • HAFA • PSC Calabasas CA

Moe,

Welcome to the Active Rain blogging community! 

Congratulations on your first post! 

Jul 14, 2016 06:56 PM
Inna Ivchenko
Barcode Properties - Encino, CA
Realtor® • GRI • HAFA • PSC Calabasas CA

I'm not a fan of options to buy for residential properties. Those deals are very rare in my area. 

Jul 14, 2016 06:56 PM
CA COASTAL ESTATES Lauren Selinsky Perez CRS
California Coastal Estates - Aliso Viejo, CA
"Your Real Estate Broker" #oclauren

You must have an iron clad contract to benefit you the buyer with lease to own as we title it here. Clause after clause after clause. Otherwise, your list here makes it very difficult to go forward.

WELCOME TO ACTIVERAIN & your first blog here. Following you now.

Lauren Selinsky

Jul 14, 2016 08:04 PM
Mimi Foster
Falcon Property Solutions - Colorado Springs, CO
Voted Colorado Springs Best Realtor

After several decades in the business, I've never actually seen one work out.

Congratulations on your first ActiveRain blog post. 

Jul 15, 2016 01:50 PM
Moe Dadseresht

For some people, howerver, it seems like an easy solution for the difficult problem of 'inability to save'!  

Jul 18, 2016 02:44 AM
Jerry Newman
Brown Realty, 210-789-4216,www.JeremiahNewman.com - San Antonio, TX
Texas REALTOR, San Antonio Military Relocation

Risky for the buyers. I wouldn't recommend a buyer to go this way. Better to get into a better position to buy via on normal conventional financing.

Welcome to Active Rain! I see you're in the Austin, TX area. You're among some great Rainers in our community here.

Jul 16, 2016 06:51 AM
Moe Dadseresht

Thanks Jerry.

Jul 16, 2016 08:47 AM
Mery Fernandez Empire Network Realty Luxury Brokerage
Empire Network Realty INC. - Orlando, FL
The Rise of An Empire, Let's Build Yours!

Hi Moe! Welcome to the world of Activerain, may your blogging  create a whole new chapter in your Real Estate Career.

Jul 18, 2016 02:01 AM