Home Buying in Austin>Question Details

Nichole, Home Buyer in Austin, TX

How does "rent to own" work?

Asked by Nichole, Austin, TX Tue Nov 27, 2012

My boyfriend and I are interested in becoming first time home owners. Is getting involved with a rent to own program a good idea if we are in the process of rebuilding our credit and saving for a down payment?

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Ron Thomas’ answer
You are desperate!
Your Credit or Finances, or both, will not allow you to go the conventional route:
You need the Seller to help you out!

The Seller will know it, and you are going to pay dearly for this service:
There aren't too many altruistic Sellers out there.

The terms that can be written into a Lease/Option can be dangerous to you:
How long is the Option period?
How much money are you putting in to the Option?
What happens if you are not able to execute the Option?
How do you know what your financial situation will be 2-5 years from now?
How much is the rent in the meantime?
Who will be responsible for maintenance and repair in the meantime?
What will be the Market Value of the home in 2-5 years?
What will be the Selling price 2-5 years from now?

This is the Ultimate Caveat Emptor!
1 vote Thank Flag Link Tue Nov 27, 2012
Only if you use an attorney. There seem to be "issues" that come up between the beginning and end of these agreements. Typically when I have looked into these for a client the interest rate and down payment are the big obstacles. Much like owner financing they tend to want large down payments and high interest.
I'd be happy to help guide you through the possible avenues to buy a home. There are a lot of programs out there to assist first time buyers.
1 vote Thank Flag Link Tue Nov 27, 2012
I bought my first house with a lease/option. The sellers didn't want to honor their end when it came time to close the deal, I went to court on my own and won. Some years later I sold it for a big profit and bought the house of my dreams.

I am considering offering a house for lease/option at this time. It is in another state.
0 votes Thank Flag Link Sun Apr 12, 2015
Wow! The comments are absolutely overwhelming!
99% of rent/lease options DO result in the buyer ending up $30,000 poorer and not one step closer to owner a home. This is such a predatory environment that many states (TEXAS) REQUIRE you to have an attorney to make absolutely certain you understand you have a better chance with you lottery.

Now, what about that one percent?
These are specially crafted agreements that address a specific situation. They DO NOT involve a buyer who can not obtain lender financing or an investor preying of those hoping to circumvent the protections in place to keep the from harm.

These successful transactions require professionals who are able to 'match situations.' They will NEVER be advertised as rent/lease to own.

NIchole, you state you goal is to rebuild your credit and save for a down payment. You goal can not be achieved via rent/lease option. Consider contacting a local lender who has a HISTORY of investing in your community through small business loans and home loans. Tell them your goal and they will counsel you regarding budgeting and asset management to get you to your goal. Sorry, Nichole, THERE ARE NO SHORTCUTS.

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.

Enter your city or zip code and call the bank that appeal to you.
PS: I receive NO benefit from Banking Grades.

Best of success to you,
Annette Lawrence, Broker/Associate
Remax Realtec Group
Palm Harbor, FL
0 votes Thank Flag Link Fri Nov 30, 2012
I have never financed a take-out loan for anyone that successfully completed a rent to own deal. But maybe there were once unicorns; I just have never seen one…

Two Realtors told me about “buyers” that lost a total of $60,000 in rent to own deals that went bad last week.

Okay, what if I don’t know anything because I have never closed one, I do know that underwriters must sign off on you getting a mortgage when the time comes to actually pay the seller in full. Do you know how they are going to interrupt your rent to own contract? Well they have a set of rules and it won’t matter what the contract says, the underwriter will follow the rules for the type of mortgage you apply for. If the contract doesn’t satisfy the minimum threshold for the mortgage you apply for the loan will be declined. Yeah, it’s that technical. See the link below, good luck,

Jim Simms
NMLS # 6395
Financing Kentucky One Home at a Time
0 votes Thank Flag Link Fri Nov 30, 2012
For rent to own to work you take one un-savvy home buyer and match them up with a slick fast talking home seller and you get "Rent to Own"

Rent to Own is a pipe dream, an urban myth perpetuated by the hopeful and real estate uneducated.

Do yourself a huge favor and please don't pursue this further. Instead work on improving your credit scores, living below your means for another 6-12 months and saving money up so that you can buy a home.

I wish you the best of luck and know that if you'll just be patient and focused, you'll be able to buy a home in the near future.
0 votes Thank Flag Link Fri Nov 30, 2012
It doesn't in most cases.
Typically they want a super large down payment that you will never see again.
Then they want you to rent for two years and get your own loan at the end of the two years.
You do the repairs on the house if there are any.

There's just lots and lots and lots of problems with this. What happens if the person you are dealing with doesn't own the house. What if you make payments to them, but they don't pay the loan on the house? Can you get insurance on a house you don't own? If they buy the insurance does it cover your investment?

Probably not what you want to hear, but here is my advice. Rent as cheap as you can stand. I mean a one bedroom or smaller in the cheapest cheapest place you can feel safe. Even in your parents basement. Save every dime you can....eat at home, watch movies at home, entertain yourself with FREE events. Don't blow money anywhere. Splurging is getting ice cream at Braums. Pay off all your debt....save for a down payment. Get your credit in order. You want to do this BEFORE you jump into a house, not while you are in it.

Over and over and over we see too many people get into this rent-to-own type situation and it just destroys their finances. If a bank won't lend to you there is good reason. It shows that you are not ready in most cases.

Also if you are buying with a boyfriend.....do yourself a big big favor and go to a family attorney before you buy. Workout a simple document of what happens if you split up. Of course we hope that does not happen, but couples don't have a great way of deciding this after the fact like married people do. Outline who gets the house, how they buy the other person out, who gets the tax credits, etc.
0 votes Thank Flag Link Tue Nov 27, 2012
Bruce Lynn, Real Estate Pro in Coppell, TX
Nichole, I see you've gotten a lot of different and some erroneous answers and are possibly confused a little. I am a full-time, full-service REALTOR® , and this topic still confuses me at times as well, so don't feel bad if you are confused a bit!

Basically, "rent to own" is a very risky endeavor, which is why Realtors are dissuaded from even assisting in that type of transaction, and attorneys are now involved. I am one of the top agents at the number one real estate company in Austin, Keller Williams Realty, and there are currently dozens of lawsuits pending regarding rent to own cases in which one party defaulted and did not follow through on their agreement. There are many pitfalls for a Tenant/Buyer, including the landlord not adhering to the agreement at the end of the lease term, or Selling the property to another party during the lease, et cetera, et cetera. I spoke to an attorney at a title company who deals with these problems all the time, and he said if it all possible, I should advise my clients to avoid these scenarios!

However, there are quite a few options for you at this point. There are sellers who do seller financing, which does carry a slightly higher interest rate, but I usually negotiate a very good deal for my buyers in that situation. In times like today when prices are still depressed, the higher interest you might pay doing seller financing might be offset by the lower purchase price you can still get currently on a first home. Also, once your credit is high enough, you can refinance through a Bank/Lender and get a fixed lower rate, and pay the seller off entirely. I have helped many buyers achieve that goal.

There are also credit repair companies that can take a look at your credit and let you know what you need to do to put yourself in a position to purchase and even help you negotiate and navigate 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. However, I have a few lenders I work with on a regular basis who would be happy to look at your overall situation and give you some free advice on where you are, where you need to be, and how to get there. They may even recommend a reputable credit repair company that they work with to help you. However, they will not charge you anything for a pre-approval, and I would be happy to assist in that phase of the process for no charge as well. That is one thing I do for my buyers, even if you're not going to be ready to buy for a year or two. That is the first step that I recommend you do if you have not done so yet. Basically, getting pre-approved with a lender and having somebody look over your whole scenario, from credit, to debt, to income, etc.

If you're not you're working with an experienced Realtor, feel free to contact me and I will explain the process a little more thoroughly for you. I represent Buyers like you all the time, have a couple of excellent resources I provide my first time homebuyers to explain the process, including a book or two, and have excellent lenders that I've worked with for many, many years to assist us throughout the process. I do not charge anything for Buyer Representation, and work very hard to help you achieve exactly what you're trying to do!

Feel free to click on my name and review my Credentials and Client Testimonials, and contact me if you would like further assistance.

Joe Jarusinsky, REALTOR®/Master Instructor
Keller Williams Realty, Austin's #1 Real Estate company, ranked #1 by Buyers and Sellers (JD Power and Associates 2012)
0 votes Thank Flag Link Tue Nov 27, 2012
Hi Nichole,

I agree with SOME of the things being said here but keep in mind that most things serve a purpose depending on the situation. I do transactions like this. Its not always a bad idea and, in fact, most buyers are truly grateful that I was able to get them a home that they otherwise would not have been able to get.

Actually it is a mortgage assignment and not a true rent-to-own but it is very similar. Its better than a rent-to-own because you get full ownership of the property from day one (and all the benefits that go with it)! There is no need to qualify at a bank or mortgage broker.

If you see a "rent-to-own" advertisement and you are curious, it may be beneficial to ask if it is a true rent-to-own or if it is really a mortgage assignment, sub-to or wrap. A lot of investors (myself included) will advertise a rent-to-own but it is actually a mortgage assignment. This is usually because most people are familiar with the rent-to-own situation but have no idea what a mortgage assignment is. I explain the difference when someone calls from one of those ads.

Its easy for people to tell you to fix your credit and save money first, but the reality is thag this could take years. Who knows where the market will be. We've been in a lull for a while so prices are likely to be higher when you're finally able to purchase traditionally.

If you have any questions, feel free to call or email.

Randy Stevens
0 votes Thank Flag Link Tue Nov 27, 2012
First, 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. In the past, many contracts were constructed where the buyer (and even the seller) didn't understand what they were signing up for, hence the lawsuits mentioned in an earlier response. That being said, having an attorney is no guarantee that you won't have problems anyway.

The best advice is to live as cheaply as you can by renting 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.

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.

Ron Cullinan
Avalar Austin
0 votes Thank Flag Link Tue Nov 27, 2012
Not very well in our opinion. Your best bet is to contact a LOCAL Mortgage Broker at "Find a Pro" in the header of this website for a purchase. http://www.naplesrealestateguys.com/
0 votes Thank Flag Link Tue Nov 27, 2012
Is doesn't work very well, in my opinion, for all the same reasons already stated. I get asked this question at least weekly and my advice is to (1) find a rental property at a real good price so you are not pouring your money into someone else's pocket (2) Save, Save, Save! There are many websites that provide budget minded tips and plans. (3) Right now talk to a trusted mortgage lender and tell them your plans, your current budget, salaries, etc. They will be able to give you a game plan regarding repairing/rebuilding credit and give you a time line of when you may be able to start shopping for your first home. (I have a list of some great local mortgage lenders if you are interested, reply back to me.) (4) 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. Good Luck and let me know if I can help. Local Knowledge, Homegrown in the heart of Central Texas! ~Rose
0 votes Thank Flag Link Tue Nov 27, 2012
This is a BAD idea. It is always a gray area for buyers and sellers and mostly ends up in a law suit.

Here is the problem: When the term of the lease is over and you need to purchase; if the property is not increased in value to the amount that indicates in your agreement, buyer is stocked and will lose their deposit. If the value increased but the buyer can’t qualify for a loan at that time, again buyer will lose their deposit. If the value increases and buyer qualifies to purchase then all is well. So two out of three buyers will lose!!!

My suggestion is to lease as minimum of a place that you need; save your money for down payment and make sure that you work with a lender to clean your credit and get you ready to purchase in a year or two. I specialize in Foreclosure and REO homes and work with few lenders that they can help you out. Please call me I will put you in touch with them.

Moe Paknia
0 votes Thank Flag Link Tue Nov 27, 2012
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