Several said things like: You will need "to have a large down payment." First, it's not a down payment. It's an option fee. Second, no it doesn't have to be large. From the seller's perspective, the larger the better. From the tenant-buyer's perspective, the smaller the better. It obviously can vary from place to place, but nowadays it's unusual in many areas for a seller to be able to get more than 2%-3% of the purchase price as an option fee. So, on a $400,000 house, many option fees would be in the range of $8,000-$10,000, and sometimes less. I've done lease-options without putting up any money. (For the legal eagles reading this and worried about the contract being legal, the "consideration" was the revenue from the one-year lease I signed.) The sellers were perfectly happy with that.
One answer stated: "Interest rates are normally higher than a mortgage company would be." That's incorrect. There are no interest rates. The tenant-buyer is paying rent. Typically, the rent is slightly above the so-called "fair market rent" for the area. And typically, a portion of that rent is credited toward the purchase price if the tenant-buyer purchases. So, in our $400,000 house example above, around Virginia that house might rent for $1,500 a month. An owner might charge $1,700 a month rent, and credit $400 a month toward the purchase if the tenant-buyer ended up buying. But there's no "interest rate" at all, and the payment amount is pretty much in line with comparable rentals, not with what one would pay with a mortgage.
Ben in particular gave some very good suggestions. However, one is largely impractical and could cause some problems: "If possible, have the seller agree to add your name to title -- Not all sellers will agree to this, but in this market more and more are. By adding your name to title along with the seller, you are assured that the seller won't sell the home from under you, and after 12 months ALL lenders will consider your interest in the home vested and allow you to refinance the home into your name instead of purchasing it. " First, while lease-option sellers may be motivated, few are motivated enough to add a tenant's name to the title. Might be good for the tenant, but opens a big can of worms for the seller. For instance, if the tenant-buyer doesn't exercise the option, how do you persuade the tenant-buyer to remove his name from the title? Yes, it can be done, but that's a huge, powerful club the tenant-buyer would have. It also opens a huge can of worms from the perspective of the due-on-sale clause. It can be argued that even a carefully constructed lease-option can trigger a due-on-sale clause. Putting a tenant-buyer's name on the title certainly is a conveyance of equitable interest. Bad, bad, bad idea. On the other hand, Ben's point was excellent that the tenant-buyer wants to make sure that the property isn't sold out from under him, and that the owner isn't skimming the rent while letting the property go into foreclosure. So what you do (as a tenant-buyer) is have the owner sign an "Authorization to Release Information" that is then sent to all the lenders on the property. This gives the tenant-buyer the authorization to call the lender, just as the owner can, to determine mortgage balance, last payment, etc. Further, the owner and tenant-buyer sign a "Memorandum of Agreement" in a form (and notarized) so that it can be filed with the city or county land records office. This document "clouds the title" without revealing the details of the agreement. Then, if the owner tries to sell and a title search is performed on the property, the "Memorandum of Agreement" alerts the world that another party has an interest in the property that must be satisifed before title can be transferred.
And, of course, use a lawyer. However, recognize that not all lawyers are the same. And not all are well-versed in lease-options. When I was developing my lease-option paperwork (as an investor who does lease-options), I had one lawyer tell me that the idea was fine in theory, but didn't work in practice. I had another lawyer tell me he didn't like lease-options because they're unilateral agreements. That is, they're one-way; they give the tenant-buyer the OPTION of purchasing, but if that option is exercised, the owner is REQUIRED to sell the property. And Mr. Lawyer just didn't like the concept of unilateral agreements. So I found another lawyer who didn't have the same hang-up.
Hope that helps.
Rent to own typically means the owner has promised to sell the property to the tenant for a certain price within a certain time frame. Often a portion of the rent paid will go toward either the purchase price or buyer's closing costs associated with the purchase in the form of a rent credit. In some cases, a non refundable option consideration deposit is collected.
1) Part of the rent paid goes toward the purchase.
2) The tenant has the exclusive or first right to purchase the property.
3) The tenant can "test" the home and area first without fully committing to buying it.
4) The tenant locks in a price today for a purchase down the road. If the property goes up in value, the appreciation gained is theirs.
1) The tenant may pay a premium for the advantages of these terms. (Higher than market rent)
2) The tenant may sacrifice some or all payments/deposits/credits if they do not to buy or perform as agreed.
Tenants and owners considering a rent to own agreement should negotiate the price, rent credit, deposit and time frames etc.. Keep in mind, for this to work, the tenant will need to qualify for a new loan and the property will need to appraise for the amount agreed. Closing costs, inspections, type of warranty deed, survey, appraisal etc. should be addressed up front. Who pays for what? What happens if there are complications?
Rent to own or lease option offerings can vary greatly. Often the scales are tipped in favor of the owner. I suggest anyone considering this type of arrangement use an attorney or licensed broker OF THEIR OWN that specializes in these types of transactions using Colorado Real Estate Commission approved forms when available. (Esp. the purchase agreement which protects both parties spelling out the details)
If youâ€™re a property owner, rent to own usually attracts better tenants & higher rents. Be certain your closing net balances after payoff. (I've had owners miscalculate & need to bring money to the closing table)
If your a tenant, set up wisely, rent to own can build equity & provide pride of ownership from move in. It can also allow you to repair your credit if needed in preparation for purchase. However, if you have the ability & desire to buy today, I'd suggest you do so. There is a much broader selection of property & some fantastic deals on the market right now.
1 bedroom Condo in Denver SW overlooking green belt $39,900 (I closed last week)
2 bedroom Condo in Denver SW ground floor ranch $35,000 (Available- Bank owned)
4 bedroom 2 bath in Highlands Ranch for under $180,000 (Available- Bank owned)
If you'd like help constructing your rent to own or a list of available "deals" in your area & price range emailed to you... I'm here to assist.
Castle Rock Real Estate
Metro Brokers DTC
For the most part I don't like 'rent to own' because although a great idea in general it is typically used in distressed situations (either buyer or seller) or an investor scheme and these two scenarios set the whole deal up for failure from the beginning. I am not suggesting it never works but be very wary and get professional counsel. Larry is absolutely right, have an attorney review any rent to own agreement before you sign any agreement or hand over any monies.
There are a lot of unscrupulous investors who prey on unsuspecting buyers with 'rent to own'. The seller/investor is basically betting that you won't make good on the agreement and then they reap the rewards of higher than normal rents and keeping your option fee. Why would the buyer/tenant not make good on the deal? Because, financially the buyer is distressed or they would just buy traditionally versus committing to additional monies they cannot afford. What does the seller loose if you default? Not much. Look at all the money they get to keep, plus keep the house, and then do it all over again to the next unsuspecting consumer. The investor typically gets you to agree to a sales price on the house the market will not bear. Again, setting you up for failure because you won't get a loan for that amount since the house won't appraise.
Rent to own appeals psychologically to buyers/renters because of one's desire for home ownership, when typically you'd probably be better off renting until credit issues are resolved. Take the additional rent money and option fee you'd use on a rent to own and save it in the bank for a down payment when you can qualify for a traditional loan that is governed. Don't hand it over to a stranger without legal counsel. I've seen horrible things come out of this. For example you go in and rent to own. The seller/landlord collects the rents and option fee and doesn't pay the mortgage. Now the home is in foreclosure and your money is gone bye bye with the owner. What are your rights? You made good, but now the bank says they own the house. Why? Because there are liens filed against the property which supercede your interest. I always suggest people should never owner finance or rent to own unless the owner owns the property outright with no liens and your lease-purchase can be filed on public record to secure your interest in the property. Again, legal advice is paramount to ensure you don't end up empty handed.
Have there been successful rent to owns and owner finances? Absolutely, but buyer/tenant beware!
From a lender's point of view, here are a couple things that can make the "lease-to-own" or "rent-to-own" conclusion a little easier.
1) Plan on renting or leasing the home for a minimum 12 months -- doing so can qualify you to close your mortgage as a refinance transaction with some lenders instead of purchase transaction.
2) Have your Rent-to-Own or Lease-to-Own contract created by a Realtor and notarized -- The Realtor will ensure you are getting a fair deal, and the having the contract notarized gives the lender confidence that the contract was legitimately signed over 12 months ago.
3) If possible, have the seller agree to add your name to title -- Not all sellers will agree to this, but in this market more and more are. By adding your name to title along with the seller, you are assured that the seller won't sell the home from under you, and after 12 months ALL lenders will consider your interest in the home vested and allow you to refinance the home into your name instead of purchasing it. The advantage of refinancing is your â€œdown paymentâ€ now becomes part of the existing equity in the home â€“ if high enough, youâ€™ll bring less money needs to the table, get a lower interest rate, and have lower PMI requirements.
4) Set up an agreement to have your rent payments paid through a third party title or escrow company. Ask them to report your payments to the credit bureaus. Paying through a third party title or escrow company assures your lender that you've been making your payments on time. Having them report to the credit bureaus will help your credit score.
I hope these tips help you in your search. I'm assuming that the reason you're looking for a rent-to-own transaction is because you do not qualify for traditional financing. As a mortgage broker, I have many outlets for loans -- both with traditional banks and some non-conforming lenders. I would be happy to offer you a free credit consultation to let you know if any financing options are currently available to you or offer you free credit counseling to repair your credit if needed. You can e-mail me at ben@bythebrookemortgage for more details.
While the agents have already hit on most of the important points one thing I would like to stress is have to have a real estate attorney draw up and/or look over the agreement for you. These agreements can be very tricky and while it is great for the buyers that may be credit challenged at the moment you can lose your option money if not careful.
Coldwell Banker Triad
Rent to own means that the seller will let you rent the property for 6 months or a year prior to you buying the home. The idea is for you to save up enough money or fix your credit issues so that you will be in a position to qualify for the home purchase at some later date â€“ that is mutually agreeable to you and the landlord/eventual seller of the property.
The pros for you are that you really do not have to ever close on the home and that you get to lock in the eventual purchase price today. This can be great for you when the market is going up. Not such a good idea for you if your market is declining in value.
The benefit to the seller is that they think they have an eventual buyer on the hook that will one day actually purchase their property. The seller also generally benefits by the tenant/possible buyer taking better care of the property since they could actually be the owner one day.
Well structured least to own purchase agreements should have a very large non refundable deposit. Or, as it is known in the industry, option money deposit. The option money means that the renter/buyer has the option to either purchase the property one day or to say thanks but no thanks at the end of the agreement and just move out. So, if the seller is selling you the option to either buy the home or just move on as renters do, you should have to pay something for that option. Thus the term option money.
Let me know if you would like more details on the lease purchase concept. Best of luck to you with your search for a new home.