Home Buying in 27615>Question Details

Patricia Amm…, Real Estate Pro in 27614

What is rent to own?

Asked by Patricia Ammerman GRI, ABR, 27614 Fri Oct 19, 2012

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David Worters’ answer
Patti, here in North Carolina, the legislature threw us a curve ball and beginning in 2012 we are now "strongly discouraged" from combining the concepts of a residential lease with the idea of a purchase contract. You'll still hear plenty of people talk about "lease purchase option" and indeed I'm confident this still happens in lots of other places. Essentially, it gave the renter an opportunity to purchase the property outright during the term of a lease. Today, the most fastidiously correct way to achieve the same goal is to enter into a lease first and, later and separately, at some point during the term of the lease, to enter into a purchase contract. Honestly, the whole idea of rent-to-own or lease purchase option works a whole lot better for small items like televisions and the like. (Amusingly, though, there's always an exception, and just this morning a client of mine closed on a townhome in North Raleigh that he had rented for 6 months. It's a long story but we got it done, and he's now a happy homeowner.)
0 votes Thank Flag Link Fri Oct 19, 2012
Rent to Own or Lease Option and Owner financed properties can and many times are riddled with challenges for buyers.

Read my blog below with many details.
0 votes Thank Flag Link Thu Nov 15, 2012
Good afternoon Patti,

Rent to own is basically a way for a Buyer to enter into contract to buy a home in the future and save money towards down payment with a rent credit out of the rent paid the Landlord/Seller every month.

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.

Trevor Curran
NMLS #40140
0 votes Thank Flag Link Fri Oct 19, 2012
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!
0 votes Thank Flag Link Fri Oct 19, 2012
Hi Patti,

This purchase approach has become very popular for those that do not have the borrowing power to implement a conventional mortgage.

"Rent to own" is an agreement between the buyer and seller that allows the buyer to rent the home with a portion of the monthly rent being credited toward the agreed upon sale price. This usually involves a considerable deposit along with a written contract the outlines the terms of the agreement.

Hope this helps.

0 votes Thank Flag Link Fri Oct 19, 2012
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