Once in a while I have a client wanting me to look for a property where the seller is willing to rent out the property with the option to purchase it at a later date.
I don’t have to tell you that this scenario does not apply within a seller’s market when the properties are selling fast, for top dollar.
But this does become a plan “B” for people that:
- Have financial difficulties such as no down-payment or too much debt.
- Have employment difficulties (have a good job but not enough time on the job to get a mortgage from the lender.)
- Have bruised credit, but are working on improving it and hoping that they will succeed within a certain time frame.
There are a few common misconceptions that people have in regards to the structure of Rent-to-Own.
- Often buyers believe that the rent amount that they pay to the seller will be considered as a down payment in the near future.
-Reality: Only part of your monthly rent will go toward the down payment. Example: Let’s say that you are paying $2,000 rent for a house that would normally rent out for $1,500/month. This means that $500/month is going to your saving account towards your down payment.
- If I decide not to go ahead with the contract I can get all my money back.
-Reality: Depending on how the contract is structured, there is a good possibility that you will forfeit all of your money if you don’t go ahead with the contract.
Let’s look at the risks and rewards for this kind of a purchase.
- What happens if after renting for a set term you re-apply for a mortgage and you are declined again? Likely you will lose your hard earned/saved cash and your contract will be terminated.
- What if the seller (that owns the property and title) gets him/herself into a legal battle, tax problems, or divorce and clearing the title becomes impossible for some time?
- What if the market value of the property declines to the point that the lender refuses to finance it?
- Who reimburses you for your improvements made to the home while living there?
- Who pays for the taxes, insurance…etc.
- Are you being asked for an upfront fee from the sellers?
- Renting to own gives you extra time to save money towards purchasing the home.
- If you’re bad at saving, rent-to-own is like a regimented savings plan.
- If you’re self-employed, you have time to establish your business financially.
- If the home is not to your liking, you can walk away. *as per contract agreed upon
- You can try out homeownership in a very realistic manner.
Rent to own is certainly a less that traditional route to homeownership, but for some people it bridges a difficult gap. The best rent-to-own scenario would be between a buyer and seller who trust one another implicitly and who understand the risks involved. Be realistic; if you choose to rent-to-own, make sure it is something you want and something you can afford to do.
In closing the best advice I can give you is this, Consult a professional before getting yourself into contract you don’t fully understand .
Written by Tibor Bogdan and Pat Pelletier