To get better numbers for the area, I used Realtor.Com for zip code 74501 (McAlester OK). The median for homes listed with that zip code was $145,000. With a 5% down mortgage fixed at 6.25% for 30 years, a house payment (principal, interest, taxes, insurance) would be about $1090 after bringing about $9700 to the closing table ($7250 is the 5% down), based on typical assumptions used on an Estimated Cost to Buyer sheet required on each real estate transaction here in Oklahoma.
Renting a home valued at $145,000 calculates out at about $1210 per month, based on landlord earning a 7% cap rate (typical for Oklahoma) and using typical estimates for insurance, taxes, and maintenance.
The rent-to-own option produces payments typically 10% above rent, or $1330 in this example, plus 4-6 months rent in advance, making $5320-$7980 as a "down" payment. The 10% premium is supposed to be the 'buydown', applied against the "principal of the mortgage" of the rent-to-own. Even with only 4 months in advance, on the 19th month you will have paid more for rent-to-own than for traditional ownership (sooner when counting tax benefits & appreciation), where traditional rental doesn't become more expensive than buying until the 81st month (sooner when counting tax benefits & appreciation) and is NEVER more expensive than rent-to-own. Rent-to-own truly is the worst of the three.
One assumption Tepper makes is that the owner/"seller" is actually interested in selling. Notice that the owner can make more off of a rent-to-own than a basic renter. Too many owners have duped "buyers" with a handshake agreement only to evict them later with no recourse because nothing was on paper, keeping the pre-payment, the buydown, and the appreciation for themselves.
My suggest to you Ann is to contact several real estate professionals in McAlester to see whether they handle rent-to-own. Given the past litigations in Oklahoma involved in rent-to-owns from both buyers and sellers, I'm willing to bet that maybe 1 in 10 will be allowed by their brokerages to write a rent-to-own contract. You are much more likely to be referred to a lawyer to write any rent-to-own contract.
Instead of the phrase "rent-to-own", try the phrase "owner financed". Your payments will be lower than a rent-to-own, comparable to a traditional mortgage, the Realtors will be more likely to assist you, and you'll be less likely to be dealing with a shady seller. The downside to this is that many would-be sellers will say, "Well if a bank won't take the risk on you, why should I?" If you can't answer that question, they'll almost certainly pass on the owner financing.
"Rent-to-own may be the worst possible way to buy a home."
Answer: No, but sometimes it isn't the best. If you can get reasonable financing, if you want to have your choice of all the homes on the market, and you're fully prepared (financially, emotionally, etc.) to buy today, then buying today is usually your best option.
"You have all the risks and expenses of both renting (higher payments than buying, no remodeling without permission, can be given a 30-day eviction notice at the end of the first lease period) and buying (home maintenance, insurance, taxes)...."
Answer: First, everything's negotiable. A blanket statement about payments, eviction, etc., is just plain incorrect. Maybe yes. Maybe no. But let's look more closely. Dan is wrong 99.9% of the time when he says "higher payments than buying." Usually, your lease payments are comparable to, or slightly higher than, you'd pay for straight rent on the property. For example, if a property costs $500,000 and fair market rent is about $2,000, most lease-options would set the lease anywhere from $2,000 to $2,500. And generally, anything above fair market rent is credited toward the purchase price. To buy the same property, you'd probably have a mortgage around $3,000, plus taxes and insurance. Let's say $3,500. No, rent-to-own may be slightly more expensive than straight renting, but is almost never as expensive than purchasing.
Dan says "no remodeling without permission." Again, that's negotiable. It's whatever the lease provides.
Dan says "30-day eviction notice at the end of the first lease period." No. It's whatever the lease provides. Some lease-options provide for a conversion to a month-to-month lease. Others provide for other steps. From a practical standpoint, most owners offering a rent-to-own to a tenant-buyer would like the tenant to exercise the option. Why evict? And really, the operative document regarding the purchase isn't the lease, but the option. It'd be a pretty uninformed seller, but you could have a 1 year lease and a 2 year option. Fine; let the seller "evict" the tenant buyer at the end of year one. Assuming the tenant-buyer hadn't violated provisions of the option, the TB could still purchase the property.
Dan: "...without any of the benefits (property appreciation, mortage interest tax-break)."
Answer: Maybe yes, maybe no. It's all negotiable. But Dan gets part of it backwards. Let's say you have an option to buy that $500,000 property for $500,000. And in a couple of years, the property is now worth $550,000. You, the tenant buyer, have locked in that $500,000 price even while the house has appreciated to $550,000. You've gotten ALL the benefits of appreciation. As for mortgage interest and tax benefits, no you don't receive them. On the other hand, you've been paying $2,300 a month, rather than $3,500 a month. You've been saving (by paying the lease price, not the mortgage) month in and month out.
But if you'd rather pay close to the mortgage amount, there is a way to get the tax benefits. The seller puts his property into a land trust. Then the would-be buyer is added to the trust as a resident beneficiary. As a beneficiary of the land trust, you're entitled to the tax benefits that the owner of the property would have received.
Hope that helps.
To find rent-to-own properties, you often have to use some creativity. Most aren't listed on the MLS.
If you use a Realtor (a good idea, by the way), your Realtor has to go beyond searching key words. And there are plenty of ways you can find a lease option on your own, as well.
The main point is that a large number of homes for sale or for rent are owned by people who'd be interested in offering the properties on a lease to own or land contract. But most won't be listed that way. So you really have to go beyond the obvious--having an agent look in the MLS for "lease option."
There really is no "best" way to find them. It depends on your neighborhood, what you're looking for, what you can afford, your comfort zone. (Are you willing to call up people who are advertising their houses to rent and ask them if they want to offer a rent-to-own? Some people are; some aren't.) So, read through the list and pick 3 or 4 that make sense to you.
Here are just a few ways.
**Using a Realtor**
[Note: If you use a Realtor--which is fine--ask them how they'd find lease-purchases. If they can't come up with more than 1 or 2 of the answers below, find another Realtor.]
--Some lease-purchases (for simplicity's sake, from here on I'll call them lease-options--in other parts of the country, similar arrangements may be called rent-to-own, land contracts or contracts for deed) are listed in the MLS. Not too many, but some. That's where to begin. However, that's not where to end.
--Search for homes that are listed both to rent and to sell. There may not be any comment that the property is a lease-option, and maybe it didn't even occur to the seller. But a property that a seller is willing to lease, but is also willing to sell is a perfect candidate for a lease-option.
--Search for homes that are listed for rent, but were previously listed for sale. It's likely that the owner was trying to sell the house, but wasn't able to. Now he/she is willing to rent it. That's another perfect candidate for a lease-option.
--Search for homes that are listed for sale, but were previously listed for rent. In today's market, there will be fewer of them, but it happens. Again, another great candidate for a lease-option.
--Search for homes with expired listings. The owners wanted to sell, but weren't able to. Many will consider renting the property, especially if it's vacant.
--Search for homes listed for sale that are vacant. The owners are hurting. They might appreciate the cash flow they'd receive from leasing the property.
--Search for homes listed for rent that are vacant. Again, the owners are hurting. And most owners of single family homes are "reluctant landlords." That wasn't their long-term strategy. Especially if they're bleeding, they may just want to get the property off their hands.
***Not Using a Realtor***
I'm not advising doing it yourself, but you certainly can. Any competent Realtor--and there are many--should be able to find you plenty of lease-option opportunities using the strategies above. However, here are a few other ways to do it.
--Advertise on sites like CraigsList for a lease-option. Advertise under both the rental and purchase areas.
--Go through the papers and look for properties that owners are trying to rent out. A lot of them won't be listed in the MLS. Approach them and explain that you'd like to rent their property for awhile, then have the option to purchase it.
--Look for FSBOs. Same basic pitch to them. You'd like to buy their house, but would like to rent it first.
--Choose a neighborhood you like. Knock on doors. Ask, "Do you know anyone in this neighborhood who might be interested in selling their home?" Often, you'll turn up people before the home is listed. Again, you explain you're interested in buying, just renting awhile first.
--Put cards up in your local supermarket.
--Attend a meeting of your local real estate investors club. It may cost $10 or $15, or maybe nothing. There's usually a time near the beginning of the meeting when investors can stand up and offer or solicit deals. You can stand up, too, and announce that you're looking for a rent-to-own. Specify what you're looking for (number of bedrooms, baths), geographic location, type of property (townhouse, single family home, etc.), maximum amount you're willing to spend on rent and purchase, and anything else that's relevant. Print up some one-page factsheets with details. Make sure you put all your contact information on there. To find your local real estate clubs, go here: here: http://www.creonline.com/real-estate-clubs/index.htm
The website below is for the Oklahoma Housing Finance Agency, and they have access to several lenders AND state bond money to get people into homes with lower down payments.