Although Marty is correct that some sellers, who can't sell their properties for the price they want, might opt to do lease-options, they're not the only ones. Some sellers prefer to do lease-options hoping to attract better tenants, and others prefer to do lease-options when working with tenant/buyers who have lower credit scores.
Before participating in one, you should try to learn enough about them, so that you can make an educated decision. You should also work with 1 or more experienced, local professionals (ie an investor, an agent/broker, or a real-estate attorney) to help ensure that everything gets handled correctly. You also should work with an escrow/title company that's experienced with closing these transactions.
Real estate situations are different in other parts of the country but in Wasilla almost all rent to own agreements do not work out well for either the seller or the buyer. Usually they are not a scam because each party goes into the agreement hoping that it will work without intentionally wanting to hurt the other.
If your monthly rent covers the sellers mortgage than the seller may often agree to a lease-purchase type of agreement. Often a seller may even be willing to supplement it a little. Depending on the length of your agreement, usually one year, you will need to purchase the property. Now you have to hope that the property will appraise at your agreed purchase which is usually just enough to cover the seller's mortgage. Normally it does not appraise at that amount, (thats the reason the seller could not sell and agreed to a lease purchase in the first place). Now you have to come up with the difference to cover the mortgage, or do a short sale, or the seller has to come up with some cash, or your deal is dead.
As you can see, there are MANY pitfalls with rent-to-own or lease purchase deals in this area. Better just to rent, get your situation together so that you qualify to make a conventional purchase at some point in the future.
A lease-option gives a tenant/buyer the opportunity to "try before one buys". Justin is correct that a lease-option tenant/buyer doesn't own the home during the lease period; yet, the tenant/buyer doesn't have an obligation to buy that property provided s/he decides s/he doesn't want it later. A retail buyer, who bought his/her property with conventional financing would be stuck with the property after closing. Although that's not necessarily a problem for some buyers, it is for others.
Some buyers, who bought a few years ago, wish that they could walk away from their properties. Some people like to argue that a tenant/buyer won't build up equity in a property. Although that's technically true, some lease-options are structured so that a portion of the tenant/buyer's payment gets applied towards the purchase price as part of the down-payment. As it is, many buyers who bought a few years ago, and who are upside-down, have negative or no equity in their properties. In other words, they made monthly payments and have no positive equity--just like the tenant/buyers. Plus, the aforementioned retail buyers and tenant/buyers would both benefit (in similar--not exactly the same--ways) property values appreciate in a particular market.
Christina, IF you could qualify for a new loan to buy a property, then you might be able to find what you want via a conventional sale. If you DON'T qualify--or don't wish to apply--then it's good to know that you have other options.
Again, your best bet for getting objective advice is contact a professional who has experience doing these deals. That professional can be an investor, a real-estate attorney, and/or an agent.
Some work out. Some don't. There are some scammers who work "rent to own," but most are legitimate. And the concept itself is entirely legitimate.
BuyBaltimore gave an excellent answer. I gave him a "Thumbs Up." You should give him "Best Answer."
One key point to keep in mind is that--just as in other areas of real estate--it's all negotiable. And this is especially true in lease-options (or in lease-purchases, a different situation but both of which sometimes are broadly called "rent to own.") The beauty of that is that the transaction can be structured to maximize both your benefits and those of the seller. That's one reason so much of the advice below is so off-base.
For example: "The reason a seller will do a rent to own is because no one will buy his home for the amount that he owes on it."
COMMENT: Sometimes true. Often not true. There are many reasons a seller will do a rent-to-own. It might be to boost the income on a property that's already generating positive cash flow. It might be that the owner recognized that sales prices are depressed today, but may not be in a few years. It might be for tax reasons--delaying the sale until the owner has retired and is in a lower tax bracket. It might be because would-be buyers can't qualify for financing today, but can clean up their credit and qualify in a year or two. And the list goes on.
For example: "none of your rent will go toward your purchase unless you pay substantially over market for the monthly rent. "
COMMENT: Untrue. It's all negotiable. I've seen plenty of lease-options where the rent payment is close to the market for rentals only, yet 20% or more of each month's payment is credited toward your purchase price.
For example: "There are many opportunities to do rent to owns except we call them owner finance."
COMMENT: As BuyBaltimore notes, those are two entirely different things. You can call a dog a cat, but that doesn't turn the dog into a cat. Anyone who calls lease-options (or lease-purchases) "owner finance" is, well . . .
For example: "As a true rent to own you would never get enough money credited to you for a eventual purchase to happen."
COMMENT: Totally untrue. Again, the amount of the rent credit is totally negotiable. BuyBaltimore cites one example where the credit was 100%, though he concedes that's unusual. But you can figure out how much a 20% rent credit comes to over 2 or 3 years. It's a lot. And with FHA financing now just requiring 3.5% down, a 20% credit (or even a 10%) is really going to help. And he's absolutely right about building a paper trail that'll be recognized by lenders.
Bill also gave a good answer and his observation "Most sellers do not initially consider a lease option but over time begin to listen to creative ways of selling their property" is right on target.
Hope that helps.
Any time there's money involved there's bound to be someone running a scam regarding it. That goes with everything...buying/selling a house, a car, a couch...whatever. You are very wise to do research and a lot of due diligence no matter what you do regardless if it's a non-traditional transaction or not.
Even working with an agent...although the transaction itself is very likely to be fully above board and "not a scam", if the agent is ignorant of a particular transaction in any way, you can definitely walk away FEELING scammed when you don't get the deal you would have received had you been working with a more informed or experienced agent. Just because someone is a licensed agent, doesn't necessarily mean they are the agent for you. Be sure to interview them before selecting one to work with.
Lease Options have been around for DECADES. It's not something that has just gotten popular in recent years as an alternative in response to today's market. I agree with Robert and Dan that you want to get advice from local experts and professionals with experience in rent-to-own transactions as every market, even within the same state or region, can be very different.
Our company specializes in rent-to-own transactions in the Baltimore area. There are many reasons a Seller chooses to offer their property as rent-to-own and it doesn't have to be that the seller or the property is in a distressed situation at all (upside-down, little equity, property not in great shape). In fact, all of the sellers we work with are NOT in distressed situations.
Here's a great, real life example: We just closed a transaction where the tenant/buyer purchased the home after renting it for 12 months via a Lease Option. The seller credited the tenant/buyer 100% of her monthly rent ($1100/mo) off the purchase price. The seller had it previously listed with 2 agents for 2 years...he received offers, but they were ridiculously insulting and he wasn't going to just give his family home away. We found a tenant/buyer within 30 days. At the end of the day, the tenant/buyer got a bargain (purchased the house for $18,000 less than the appraisal) and the seller got his asking price which netted him $50,000 more than had he sold through an agent! 100% legitimate and all parties were 100% happy. I will say that the only unusual thing about this transaction is 100% "rent credit" is more the exception than the rule. I would say 5-10% is the average but we work with several sellers who are able and offer 20-30%.
One of your interview questions when finding the right agent could be "Tell me the difference between a Lease Option, a Lease Purchase, and Owner Financing". They are very distinct transactions and you definitely want to steer clear of anyone who refers to those terms like they are all the same thing. You definitely want to know the difference yourself and any agent representing you should know the difference as well. Absolutely have your contracts reviewed by an attorney (again, one who is familiar with rent-to-own transactions) prior to signing. Check references, too.
Another point...rent-to-own can also be a great strategy even for qualified buyers. We have several clients who could in fact get a loan today and purchase outright. However, their time constraints for their move date make it difficult as the traditional closing these days very rarely is less than 30 days. Many of our tenant-buyers keep a close eye on interest rates and would rather purchase later down the road when they believe the best rates will be offered. Their timing of their purchase is very strategic and while they wait for the right timing, they are able to enjoy living in the home they are ultimately going to purchase. Renting to own is not just for the credit challenged, although the majority of our tenant/buyer clients do need credit repair before securing financing to ultimately purchase. We have a 90% success rate in our tenant/buyers ultimately purchasing the home.
And one final point...renting-to-own isn't for everyone. I don't encourage anyone to enter into a rent-to-own transaction unless they know that particular home is the home they want to eventually purchase in the near future. In most cases, there is a non-refundable Option Fee that only is applied towards the purchase of the home and so if you don't purchase, you don't get that option fee back in most cases.
Everything is negotiable (down payment, monthly rate, length of term, etc). Figure out what terms and price points will work for you. It'll make the process of elimination much easier when finding the right seller to work with in this somewhat longer-term arrangement.
Here's blog I wrote about downpayment...
if you want to own, start saving....Yesterday.
In 2005, the Texas legislature virtually outlawed 'rent to own' and 'contract for deed' transactions (unless done by a lawyer). They did so because unscrupulous 'Sellers' were defrauding potential Buyers. There are several traps to such a transaction:
1. If the Seller doesn't make the mortgage payments while the property is being rented, the Renter/Buyer loses any interest in the property at foreclosure. Of course, by that time, any deposit they left with the 'Seller' is long gone in most cases.
2. After meeting their rental obligations for a defined period, the Buyer tries to execute the Purchase, only to find out that the home won't appraise for value and they can't borrow the purchase money. The 'Seller' then says they are in default and does it again to another person.
3. Such contracts convey no interest in the property, they are just paper. So, they are only as good as the person who makes the agreement. In some cases, the Seller 'knows' that the Buyer won't be able to complete the transaction. That makes it a scam. That doesn't mean that ALL rent-to-own properties are scams, but it does mean be very careful.
Properties that are sold on a 'Lease to Own' basis are usually those that can't sell under other terms. The buyer's credit is sub-par or the property is overpriced or in a flood zone or some other problem. If you enter into such a deal, get yourself the best professional help[ you can find.
I have attached a link to a thoughtful article that covers the subject well.
Also, if you are in need of building up a down payment over time...there's a very specific way that the paper trail needs to be handled in order for any lender to accept it. Getting a seller credit (either via seller help or a reduction in purchase price) is very different than demonstrating to the lender that funds are to be considered as a down payment.
And yes, Anna is correct...typically if you decide not to purchase, funds submitted as a down payment/Option Fee that counts toward the purchase price of the home are non-refundable.
That being said and the fact I represent buyers and sellers in the area you have the question about I feel confident in giving you a answer that will fit your needs.
There are many opportunities to do rent to owns except we call them owner finance. As a true rent to own you would never get enough money credited to you for a eventual purchase to happen.
The term rent to own was first brought to practice in the lower 48 states by some one want a new catch phrase to help move real estate.
In "The Real Estate Dictionary" the word Rent has a definition as meaning; Consideration paid for the occupancy and use of real property. A general term covering any consideration (not only money)
I think the key word in the definition is the word "USE" which does not give a person rights of entirety.
When you rent you are considered a tenant and in definition this means; 1) A holder of property under a lease or other rental agreement. 2) Originally, one who had right to possession, irrespective of of title interest.
In a owner finance transaction the buyer and seller comes to terms in purchase price, down payment, payments, term, interest and any possible baloon payments.
The terms of default could be written in the sale agreement or it could just be govern by state law.
I strongly urge you to consider doing a owner finance Purchase and Sale Agreement with your favorite Realtor.
As to whether or not a "rent to own is a scam" I say If the deal sounds to good it probably is not true.
If you want to rent...just rent. Most single family homes that are currently rented would also be for sale if the seller did not owe more on the house than the house is worth.
The reason a seller will do a rent to own is because no one will buy his home for the amount that he owes on it. Therefore, none of your rent will go toward your purchase unless you pay substantially over market for the monthly rent. You will just be renting the home while you decide whether you want to buy it or not.
Many Sellers offer rent to own ( lease purchase) and no its not a scam. It is a way for a buyer to get into a house and allow some time to build credit or save for a down payment . I would be carefull make sure it appraises at the asking price and have it inspected.
Licensed Associate Broker
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William Raveis Legends Realty Group
However, the situation in Wasilla currently is that prices on homes have not dropped dramatically like they have in other parts of the country. Many houses have seen values drop, others have not dropped. Any house that was purchased for more than $300,000 since 2006 probably has seen some loss of value.
There are still plenty of buyers for houses that are priced at market. Any seller that has equity and seriously wants to sell can do so without resorting to a lease-purchase transaction. It is rare that a seller with equity will agree to a lease-purchase...but not unheard of.
The vast majority of lease-purchase deals in Wasilla are on homes with no equity. Unless the value of that home rises during the lease, when the time for purchase comes someone is going to have to bite the bullet and pay off the excess mortgage.
In other parts of the country, especially in places with a much larger population and a less transient population, you may find sellers who would like to do a lease-purchase transaction even though they do have good equity on their home. These are commonly the same type of seller who might agree to an owner financed transaction. This seller would rather have the monthly payment over time than the lump sum of cash.
If you are qualified there are many good properties in the valley you can get into.
Your first goal is to get prequalified with a lender of your choice. There are many good ones out here.
Then after you get prequalified hire a great Realtor like myself or Marty to represent you in your transaction.
As the buyer you are normally not responsible for the commision paid in direct result of the sale. So you get quality representation on your side of the transaction.
Please feel free to contact a great Realtor like myself with your questions directly. I am here to help!
"Rent to own" is very real factor in an evolving real estate market. Several years ago it was nearly unheard of but today with so many people having damaged credit "lease option" transactions are increasing in popularity because of necessity.
To identify these real estate alternatives, we would recommend contacting a local real estate professional for their input. Most sellers do not initially consider a lease option but over time begin to listen to creative ways of selling their property.
Like many things in life, there are good people and unfortunately bad ones. Lease to own is commonly done by sellers who are unsuccessful at getting their price on a conventional sale and by buyers who are unable to qualify for financing currently.
There are lots of pitfalls to watch out for, but opportunities too. Find a local agent with experience dealing with these, don't be a guinea pig. Review all your documentation very carefully and make sure you understand the terms and are in agreement with all of them. Best of luck.