Enter A Rent To Own Contract With Your Eyes Wide Open

By
Real Estate Agent with EXIT Realty Beatrice Associates 9506757

Eyes wide open rent to ownEvery month I get a call from a potential buyer looking for rent to own home.  Upon discussing further with the potential buyer, they seek a rent to own situation because they cannot traditionally finance a home. 90% of the time this is why a buyer opts to consider a rent to own

If you do decide to go the rent to own route, make sure you have a full understanding of the rent to own contract.  Go into it with your eyes wide open. Be aware that many of the "out of the box" rent to own contracts are filled with risks for the buyers.

A typical contract with a rent to own will often protect the seller in every way possible and disadvantage the buyer at every turn.

What Is A Rent To Own?

A renter/buyer and a landlord/seller enter into a lease agreement with an option to purchase during the lease period.  Typically the buyer will pay a rent to own premium upfront or on a monthly basis.

For example, if rent is $1800 a month there would be the option premium of say $250 a month added for a total of $2050.  The option premium would then be applied towards the purchase.

Hire An Attorney

If you decide to go down the rent to own path, without question, hire an attorney.  As I stated the renter takes the burden of the risk in a rent to own contract. 

There can be many gray areas to the contract if not hashed out ahead of time.  If something should go awry and you end up in court, the judge will fall back to what the rent to own agreement says.

The Potential Downsides Of A Rent To Own Contract

Everything is negotiable in a contract.  You and your attorney should negotiate better terms and if not at least understand the downsides.  Here are some typical terms that a seller will try to put in their contract.

You Will Be Responsible For All Maintenance

Unlike traditional rent, you will often see a clause that you are responsible for all maintenance.  The thought is you are reaping the present and future benefit of any maintenance on a home. 

The downside is if you do not end up buying the home you could be leaving significant money on the table in repairs that would typically be done by a landlord.  A hot water heater can be $800- $1600, a roof $6000 or more. the list goes on.....

There Is A Lease Agreement You Must Abide By

Before exercise your right to buy the home, there is still a lease with rules you need to abide by.  There could be a whole slew of reasons where you break the lease and expose yourself to eviction.

The simplest is, you don't make your payments on time.  One late payment can put you in violation of your lease agreement and open you up to eviction.  But there could be noise complaints or an unauthorized pet that would allow the landlord to evict you as well.

Your Option To Buy Premium Is Left On The Table

If you do not purchase the property your option to buy premium stays with the landlord.  This could be because of an eviction or you just opt not to buy.

Either way your losing money you would not have to pay in a straight up rental agreement. And don' forget leaving the cost of any improvements on the table as well.

Your Premium Does Not Add Up As Fast As You Think

Your option premium does not add up to as fast as you think.  If you pay a 1% option fee upfront of $3250 and a $250 a month premium, on a $350,000 home, you have only accrued $9250 towards the purchase of the home.

That won't even cover a minimum down payment of $10,500 that traditional financing will require.  Never mind the closing costs that are required by a home buyer.

You Eventually Need To Get A Mortgage

If you went the rent to own route you probably had some financial issues that prevented you from securing a traditional mortgage.

While you are renting the home you need to straighten out your finances so you can secure a traditional mortgage. 

Make sure by the time the lease is up you have your financial house in order.  Be realistic of what you have to do to be able to get a mortgage by the time you have to purchase.

The House May Not Be Worth The Agreed Purchase Price At The End Of The Lease

Upfront you will have agreed on a purchase price with the seller.  But realize the real estate market goes up and down.  No one can predict what will happen in the future. 

You may have locked in a price that the house is not ultimately worth it and your stuck in an agreement where you will have to buy the house or lose some significant money.

Summary

The harsh truth is you can't secure traditional financing and you want to secure a home for your family.  The seller knows you don't have a lot of options and will push to get as favorable of a contract as they can.

Make sure you have a full understanding of your rent to own contract.  Realize that at every turn there is a potential for you to lose not only your option premium but any improvements you made to the property.

This is not a time to go it alone.  Hire an attorney with rent to own experience.  Try to negotiate a compromise to unfavorable conditions of the contract. 

For example, if you agree on a purchase price, have a clause that states the house must appraise for the purchase price at the time of the purchase. 

As a final thought, there is another route without taking so much risk.  Rent a home. 

Pay yourself your own premium and put it in a separate bank account to accrue a down payment and closing costs. 

Other Real Estate Resources:

Meanwhile, correct your financial situation so you can get a mortgage.  You accomplish the same thing without taking any risk.  And, you can then go out and have your choice of homes.

Renting or buying real estate can expose you to real estate scams.  Paul Sian shares some of the common real estate scams you might run into.

What's the difference between earnest money and down payment.  Learn about earnest money from Bill Gassett.

Your credit score is an important factor when buying a home.  Luke Skar shares tips on improving your credit score.

 

Comments (6)

Kristin Johnston - REALTOR®
RE/MAX Realty Center 262-567-2455 - Waukesha, WI
Giving Back With Each Home Sold!

Great information.  Thanks for sharing and have a wonderful day!

Oct 10, 2020 06:22 AM
Kevin Vitali

Thanks Kristin Johnston - REALTOR® 

Oct 11, 2020 05:04 AM
Michael Jacobs
Pasadena, CA
Los Angeles Pasadena 818.516.4393

Hello Kevin - while it didn't occur on a regular basis, I have received the calls from a prospective(or perhaps just hopeful) buyer who was inquiring about a rent-to-own real estate possibility on more than one occasion. Usually with some discussion and lots of listening, the truth became apparent.  

In over 25 years of real estate, I wasn't involved in any such transactions.  The success stories have been around since I received my license.  

Oct 10, 2020 06:40 AM
MadisonMortgageGuys .com
MadisonMortgageGuys - Oconomowoc, WI
Your local mortgage company serving 47 states!

Great information for home buyers looking to go the route of rent to own Kevin Vitali!

Oct 13, 2020 01:43 PM
Roy Kelley
Realty Group Referrals - Gaithersburg, MD

This is good information to share. I hope you are enjoying a very productive autumn.

Take care and be safe.

 

Nov 28, 2020 08:45 AM
Kevin Vitali
EXIT Realty Beatrice Associates - Middleton, MA
Helping Massachusetts Home Buyers and Home Sellers

Thanks Roy Kelley 

 

Jan 13, 2021 05:19 AM