Rent to own, known as a lease option, is a technique investors use to make money. You pay higher up front, about 5% of the purchase price, plus extra rent each month. The regular rent goes to the owner, but the additional payments are used to buy down the price of the home. If you end up not being able to qualify for a loan from a lender at the end of your option period, you don't get any of that money back. The investor will try to get you to take the shortest option period possible, maybe one year, banking on the fact that you won't be able to exercise your option by the end of it. Most renters end up not being able to qualify for a loan, which is why investors do it.
For example, if you buy a $275,000 home and a $7,500 up-front fee, then pay a rent premium of $500 a month on top of their $1,600 market rent, you'll have $13,500 saved after one year and $25,500 after three. But, if you just did that on your own, you'd have the same amount with interest.
That would be great since prices are rising, but investors are fully aware that prices are rising, so your option period will be short.
One disadvantage is if you can't qualify by the end of your option period, usually 12-24 months, you paid all of that for nothing. You may be able to get a contingency worked into a contract for the return of the extra rent and up-front payment in a buyer's market, but we're in a seller's market. Another is the owner who negotiates a lease option, but doesn't tell you he's in foreclosure, and the home is repossessed without your knowledge, a scenario far more likely in this market.
Have you spoken to any lenders yet to see what you need to qualify? When you have this information in hand, you'll know if you can swing a house with the rent applied to the loan. But, it'll only make sense if you can get a long option period, AND you know you'll be able to qualify at the end of it. But, if you can save 3% or 3.5% for a down payment by the end of the option period and still get a similar house, you won't need to do a lease option, and you'll have many more houses to choose from.
So, do two things:
1. Talk to a lender or two (I can send you some to talk to)
2. Do a search on lease options, and you'll find a lot of information on this investment technique, because that's what it is.
Good question, and good luck! Call or email anytime with questions.
Cory La Scala, REALTOR
Lic # 01443391
Trevor has the facts correct. Furthermore, contracts for lease option to purchase are considerably more complex and and we would recommend using a real estate attorney rather than an agent to draw up and review the terms from the landlord/seller. We work in both of those markets and lease options are a challenging find.
Best of luck,
Mark & Kari Shea
Shea Real Estate
National Association of Realtors
CA DRE License 01713506
Rent To Own is a better deal for the Seller than it would ever be for a potential Buyer.
The basic concept is finding a way to "force" savings towards a down payment by including a portion of the monthly rental that goes towards that savings. You pay your rent every month and your Landlord deducts a pre-determined amount to hold in a special bank account, called an "escrow" account. Your Landlord holds that money until you have saved up enough---through this "forced-savings" method---to meet a down payment to purchase the home.
The terms of the purchase price, including the down payment amount, and the amount to be set aside from the rental for down payment, are all set down at the time of lease signing.
It's all about helping the renter/tenant save up enough money for a down payment to buy a home (in this case, the one you're renting). But this is a better deal for the Seller because he gets to lock in a purchase price and a buyer today for a future sale.
Saving money for a down payment? Well, heck, you can do that on your own.
If you are dedicated to the idea of buying your own home, you can create your own savings plan to save up enough money for a down payment. And when you have saved up enough for a down payment, if that takes a year or two or more, YOU get to decide on the price you're willing to pay for the house at that time based on current market conditions. You won't be locked in to a price that may be a lot higher than what the house is worth in the future.
With Rent To Own you'll be locked in both to the house and to the price, even if it takes you 3 years to save enough through the forced savings of the rent payments. What happens if three years from now your life situation has changed? Maybe you need a bigger/smaller home. Maybe your employment has relocated. Maybe your credit or income is insufficient to qualify for a mortgage loan.
Find a way to save up on your own; not with Rent To Own.
Sit down with a local Mortgage Banker and get yourself prequalified, too. You may find you're better qualified than you think you are, and, if you're not, at least you'll know how much loan your income and credit qualify you for, and how much you have to save towards down payment and closing costs.
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Rent to owns do exist, but they are very rare and generally not a good idea. Most of the time someone ends up losing out. Generally, the rent to own renter pays a higher than market rent. You should be focusing on paying a low rent so that you can save up for a down payment and improve your credit. Patience, your time will come :) In the mean time, feel free to contact me directly, I have some referrals I can give you for credit repair professionals.
Keller Williams Realty
I encourage you to rent, pay down your debts, and save money. Once your credit scores are up you can qualify for an FHA loan or 5% down conventional loan option.
Best of luck.