The Truth About “Rent To Own” Real Estate Deals March 1st, 2013

Categories: For Buyers

RENT TO OWN

RENT TO OWN

I’ve been fielding a lot of calls lately from buyers wanting to “RENT TO OWN”. I’m not sure if there are late night ads on TV or what, but the calls have certainly increased.

Usually the question is something similar to this, “do you know any houses I could rent to own?” Inevitably the question comes when I’m in the middle of writing an offer or doing an online search for a client so my answer is usually a short no and I’m back at work.

However today I spent some phone time with a young lady who sounded real earnest about “renting to own”. I stopped my work, let two other calls go, and tried to explain what “rent to own” is not.

  • Rent to Own” is not a lease-option agreement, at least in the minds of buyers. A lease-option entails putting up some option money, setting a date for a closing that is usually only months or at most a couple years away, and agreeing to lose that option money should you not close. Most “rent to own” hopefuls unrealistically hope to rent the house for an extended period of time after which somehow it becomes their house.
  • “Rent to Own” is not owner finance. An owner-financed home almost always requires a hefty down-payment, above market interest rates, and shorter term loans. Very few homes in this area that actually have running water and a road are offered under owner-financed terms. I just checked the MLS and right now there are only 6 in the Palmer/Wasilla area and two of them are over $500,000.
  • “Rent to Own” does not mean that you can rent a house for market rent and eventually own it. This just doesn’t happen. Why would a seller just give away their home because you rent it for some time? He could have rented it to someone else during the same time and still own it himself after they leave. There has to be something in it for the seller.
  • So what are the realistic options?

  • The best option is to just find a reasonable place to rent and settle there until you can save up the money or repair your credit enough to by a house.
  • Buy a small lot and build a tiny house on it until you can build a bigger house. This will require a small pile of cash but will be better for you in the long run. I know a young couple who are almost finished with their big house after 5 years. They have lived in their tiny one room cabin on ten acres all this time. But they now have a ton of equity. Who knows? You may find that your tiny house is all you need.
  • You could do a real lease-option. This entails putting up some significant amount of money as option money, ( usually at least $5000), as incentive to the seller to take their house off the market with an agreement to sell it to you at a later date for a fixed price. Instead of putting the option money up front, some sellers may allow you to spread that money over time by paying a rent that is higher than market. The difference would go toward this option. When you do buy, this extra money is applied to the purchase. The sellers who usually agree to a lease-option are ones whose houses cannot sell for some reason. So be careful
  • Hopefully there is enough here to stop people from wasting time looking for deals that don’t exist. If you do find that very unusual situation you still need to proceed with extreme caution. There are a lot of pit-falls in lease-options or even the elusive, “rent to own”.

    If you would like to find out more about these situations drop me a line. [email protected]

    Written by Marty Van Diest

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